There is a saying in the market that an equity investor should “sell in May and go away”, referring to the apparent seasonality in equity markets. Until now, the markets seem to have ignored this, and the global stock market rally has continued into May. That said, in recent days there have been some signs that the mood is changing from bullish to bearish – and this is becoming evident in Emerging Markets equity, fixed income and FX markets.
Looking ahead for EM performance over the coming month, we think three factors are crucial in determining whether risk sentiment turns more negative or whether the positive sentiment is maintained. First, will macro economic data – especially in the US and Emerging Asia – continue to surprise on the upside? Second, will there be an ongoing improvement in liquidity conditions in global markets? Finally, will we have a technically-driven set-back as investors take profit on risky positions?
Danske Research has developed an Economic Surprise Index (DMESI) that tracks positive and negative surprises on US economic data. The DMESI went into positive territory in mid- March and, as the graph on the right shows, this coincided with a tightening of the EMBI spread. Hence, there seems to have been a fairly high correlation between the positive growth surprise over the last couple of months and the appetite for Emerging Markets assets. Therefore, a lot will depend on whether we continue to be surprised on the upside or not. Our US analysts are confident that the underlying improvement in the US economy will continue in the coming quarters – which should provide at least some support for general Emerging Markets sentiment. That said, DMESI has been trending upwards since March, but more recently we have had some negative surprises. Furthermore, we have had some negative surprises over the last week on Asian and European economic data – for example weak Chinese export numbers and very weak GDP figures for Germany. If these negative surprises continue then this would probably weaken the appetite for Emerging Markets assets – at least in the short-run.
