It is hard for us to deny the selling pressure that has been prevalent in the Emerging Markets space in the past few weeks, and predominantly in the past few sessions. We have documented accumulation in puts over the past several months in EEM (iShares MSCI Emerging Markets, Expense Ratio 0.67%) and the significant underperformance YTD of major EM segments (China and South Korea largely) compared to the U.S. domestic equity market, which is in the daily headlines as challenging an all-time high.
The third largest country weighting after China and South Korea in the MSCI Emerging Markets Index is Brazil at 10.86%, followed by Taiwan (10.29%), South Africa (7.07%), India (6.75%), and Russia (6.13%).
Flows in the broad EM based funds EEM and VWO (Vanguard Emerging Markets, Expense Ratio 0.20%) have been decidedly cautious looking in recent sessions, with EEM losing nearly $2 billion in net outflows while VWO has seen more than $300 million leave the door.
In the past couple days we have also seen evidence of spillover in single country EM based ETFs EWZ (iShares MSCI Brazil, Expense Ratio 0.60%) and RSX (Market Vectors Russia, Expense Ratio 0.62%) which are also seeing moderate redemption activity.
Of the top seven single country components of the MSCI EM Index, every single one of them is down year to date as we head into the end of the first quarter, in range anywhere from down 10.19% to down 2.75%, which is truly intriguing given the push in U.S. domestic equities, and just the simple lack of participation on the EM side in what is not necessarily a broader global rally.
Conventionally thought of as a higher beta equity segment and traditionally rallying in broader bull markets, market participants seem to be displaying a lack of conviction in the EM space here as relative strength has severely waned in the past quarter.
It will be especially interesting to monitor where big money hedge funds and institutional managers are positioned relative to EM (i.e. over or under-allocated) via the quarter end March 13F filings, which will slowly surface to the investment public by Mid May at the latest.
With many specialized segments of the greater EM space trading at year to date lows, we would not be surprised to see greater than normal activity in these smaller and likely lesser-known EM based ETFs (which have been the worst performers YTD in the EM arena), SCIF (Market Vectors India Small Cap, Expense Ratio 0.85%), SCIN (EGShares India Small Cap, Expense Ratio 0.85%), SMIN (iShares MSCI India Small Cap, Expense Ratio 0.74%).
The common theme here is clear, small cap India based equity funds, which have taken an absolute drubbing lately on heavier than average volume. Managers that are not allocated to the space are almost forced to at least take a look here, even if it’s from a longer term point of view and not from a trading standpoint.
Market Vectors India Small Cap
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