While these rallies seemed powerful and alluring at the time, all of them ultimately failed, disappointing those who thought that the final lows for Emerging Markets were in. From a charting perspective, the relative strength ratio has consistently traded below the 40-week moving average since 2010, with the rallies either only marginally exceeding or turning lower at that average (see chart).
Granted, such a long period of underperformance does mean that they appear to be significantly undervalued relative to U.S. stocks now, with a forward P/E of only 11.5 on the MSCI Emerging Markets Index compared to 16.8 for the S&P 500, but that has generally been the case for the past several years and it hasn’t prevented Emerging Markets from continuing to lag. Part of the problem stems from the fact that many Emerging Markets indexes carry heavy weightings in Financials and resource-related stocks that have been decimated by the commodity rout, making them appear cheaper than they really are. In other words, they may represent a value trap.
Related: 3 High Octane Value Trades for a Bear Market
In our view, the latest move appears to be another head fake in the ongoing long-term relative downtrend, suggesting that it still makes sense to steer clear of Emerging Markets. Significant macro headwinds remain in the form of the ongoing slowdown in China, low commodity prices (despite the recent rebound), and cautious consumers in Western countries. Investors who are looking for overseas diversification may be better served by sticking with developed markets for the time being, where aggressive monetary policy support may provide a helpful tailwind for risky assets in those markets.