What will it take for investors to embrace emergers once again? It will probably require a Chinese commitment to some form of stimulus. The asset reflation game – the one that purports to drive consumers as well as businesses to borrow and spend – has been the critical component for investor enthusiasm since the official end to the Great Recession in June of 2009. Five-and-a-half years… why would anything change now?
Of course, it may be difficult to gauge enthusiasm for the amount or the timing of any Chinese fireworks. That’s why one might be better served to watch for the possibility of a relative strength revival from the basic materials sector. The emerging market run-up from February to September largely corresponded to SPDR Select Sector SPDR (XLB) success in the same time period. The XLB:S&P 500 price ratio’s recent fall from grace corresponds to the waning interest in emergers. It follows that if XLB regains its momentum over the broader S&P 500, emerging market ETFs like VWO will likely reconvene at the “risk-on” party.
