This year’s best-performing markets, the S&P500 and Nasdaq100, accelerated lower in the last week of May before finding support provided by the early March lows. This sell-off worked off the bullish sentiment extremes seen in late April, with sentiment now close to pessimistic extremes. This coupled with the relative outperformance by the MSCI EM versus MSCI World through the sell-off and the subsequent strong bounce in US markets suggests that equity markets have formed a tactical low for a rebound through June. We continue to believe that this is a highly volatile trading- range environment for global equities over the coming 12 months.
EM outperformance an ending signal
Despite the late-May breakdown in lead developed markets, the MSCI EM managed to outperform by roughly 3%. This outperformance has seen the MSCI EM (USD) versus MSCI World ratio hook up ahead of major chart support provided by the January-2016 and October-2018 lows to maintain the multi-month basing pattern which has followed the 2010-16 derating cycle for emerging markets. While this outperformance has only been over the first week of June, it is worth noting that ahead of the December-2018 lows, the MSCI EM fell less than the MSCI World for roughly a month before global markets staged their impressive rally. EM outperforming versus the world in a correction has been a rare event, but when it has occurred, it has typically signalled that the global equity market sell-off is in its final phase.
India and Asean leadership
Within the Asia EM space, India and Asean are relative leaders. After spending the past four years in a broad consolidation pattern, the MSCI India USD versus MSCI EM chart has broken out to a new all-time high, moving above the August 2015 highs. The MSCI Asean USD versus MSCI EM ratio, after retesting the breakout area from the 2013-18 downtrend, is rising again suggesting the resumption of the newly formed uptrend and rerating cycle for Asean.