For forecasting purposes, Zettacap has created an Emerging Market Conditions Index (EMCI). Its goal is to measure the underlying environment for Emerging Markets (EM) which allows for forecasting and for identifying inversion or trend reversal opportunities.
At present, our index is about to enter a zone when investing in EM looks exceptionally interesting. Further our forecast is for a significant low to occur in 2019, represented by the green line. The result should be a turn in how investors view EM, after an approximate decade of relative under-performance in relation to Developed Markets (DM).
Chart 1: Zettacap’s Emerging Market Conditions Index, from January 1975 to November 2018 with forecast for our base-case represented by the green line
The most significant turning points are identified by descriptions in the chart. The coming inversion, or significant low forecast for 2019, is shown to be a ‘Recession Scare’. Currently, commentators are focused on a global slowdown with many expecting a major recession to hit within the next two years. Markets are understandably worried over the impact of a recession given the equity market meltdowns that coincided with the last two.
However, our models at present show that growth trends will begin to stabilize in 2019 with the EMCI making a major low at that time. The next upturn in the EMCI is expected to be powerful especially after the weak conditions for EM over much of the previous decade. Though too much to explain in this post, the next boom for the EMCI, which should become apparent to most by 2020, is expected to be so powerful that it could result in an ‘EM Bubble’ during the following 5 or so years.
EM equities is one of the most volatile investment classes and forecasting a powerful / positive inversion after an approximate decade of under-performance is an out-of-consensus call. Please discuss with your investment advisor before taking any action.