A mix of; falling oil prices, a “pause” in the Fed´s rate hiking cycle and a softer USD could all be leading to an interesting set up for Emerging Markets going forward. Morgan Stanley upgrades the EM space today:

They write:

“The growth differential will swing back in favour of emerging markets, which will resume the mantle of growth leadership,”

“We expect DM growth to slow as we move through the year, given tighter labour markets, fading fiscal stimulus in the U.S. and also the impact from withdrawal of monetary accommodation,”

“In EMs, growth will hold up relatively well as external headwinds recede.”

There are of course risks to the above scenario with credit further imploding, trade tensions and other political unknowns that could derail the EM bull brewing.

Interesting to note is the relative performance of Hong Kong lately. Note the candle pushing above the 50-day average today as well as taking out the negative trend line. Watch the HIS index carefully here as the break out higher could cause a big squeeze.

For anyone trading the biggest Emerging Market ETF, EEM US, it is vital keeping track of the biggest component, Tencent. We have written about Tencent on several occasions lately, and for us this Asian giant represents a great barometer for the entire EM/Tech space.

Tencent closed above the negative trend line for the first time since the highs. Do note we ended above the 50 day for the first time since June when the stock traded +30% higher.

EEM US (orange) and Tencent (white) move in tandem.

Emerging Markets volatility is still elevated, but this offers great opportunities for using high volatility for your strategies. Depending on your risk profile, covered calls or ratio spreads could be an interesting play here. (For the more novice reader, here is a link to option trading strategies worth reviewing).

Earlier this autumn we outlined why EM was a relatively more interesting space than the developed markets. Since then, the EM space has outperformed well, but seen over a longer time period, recent relative outperformance has much more room to catch up.

Source: charts by Bloomberg