And just like that investors are feeling emerging-market stocks once again, which is odd given the recent commentary from companies on China.
The MSCI Emerging Market Index reached a seven-week high on Wednesday. Fueling the buying activity is a budding view that the pace of the macro slowdowns in India and China are slowing, and could slow further amid government stimulus efforts (amazing how a headline about building bridges to nowhere in China could spur risk-taking ...)
Furthermore, the U.S. dollar has weakened relative to foreign currencies as the expectation for the pace of interest rates hikes has been pushed out thanks to a sluggish September jobs report.
In the chart below via Yahoo Finance, equities in India and large caps in China have led the rebound in the interest in emerging markets.
Source: Yahoo! Finance
Talk about an abrupt about-face in terms of sentiment. According to Blackrock, investors pulled about $3.2 billion from emerging-market equity exchange-traded products in September. Net outflows, says the asset manager, are at almost $30 billion year to date. A recent Morgan Stanley note highlighted a shift out of singular bets on emerging markets -- emerging-market equity funds have seen 14 consecutive weeks of outflows, with the current outflows representing the largest since 2008.
Playing the emerging-market trade is a dangerous one unlikely to last for a prolonged period, and it could end within a few weeks as earnings season kicks into overdrive. Potentially fueling that renewed bearishness is a wave of commentary on the actual economic standings in places such as China and India ¿ it's reasonable to anticipate that more of what we heard from Yum! Brands (YUN) and PepsiCo (PEP) is waiting in the wings.
Once the emerging market trade gets switched off, small-cap stocks may catch a bid on the thesis the U.S. is the best house in a bad neighborhood. Take note that the Russell 2000 has lagged the Dow Jones Industrial Average and S&P 500 during this mini rally, suggesting too much bullishness on emerging markets and not enough confidence that our economy will do OK in 2016 (but not great).
Source: Yahoo! Finance
Pay attention to the early commentary from executives on emerging markets, which has been negative:
"Global macros are volatile -- and wherever there is volatility in the marketplace, the consumer behavior does reflect some of this volatility. The good news is that, we're not luxury items or high-ticket items; we are basic food and beverage items --so, we see a slowdown, but not significant," said PepsiCo chairman and CEO Indra Nooyi on the company's earnings call this week. If there is a hint of a slowdown for basic food items in emerging markets, then rest assured the demand for higher-ticket items such as luxury goods and appliances may be more challenging in those countries, too. And if that's true, the demand to produce such products could be under pressure ¿ you get the point, which is that the logic on emerging markets right now is misguided.
Also supporting this belief is a horrible quarter from Yum! Brands, which will likely lead to a contentious analyst day on Dec. 10 (2016 guidance will be shared by execs ¿ no guarantee it's by the current cast of execs). In listening to Yum! Brands earnings call, one would think the country is absolutely collapsing. The fast food giant warned about severely slowing sales at KFC and Pizza Hut in China due to the yuan devaluation and promotions that didn't resonate because the Chinese wanted even cheaper eats.
Where the market may not be wrong is on the outlook for GoPro (GPRO) into year-end. The stock got spanked on Wednesday -- despite it already being under pressure -- following a negative Morgan Stanley note, which voiced concern on demand for GoPro's new, small camera, the Hero4 Session.
Having toyed around with the camera a bit, the analyst made some good points ¿ the larger screen is preferable if you are into recording action-sports adventures. Moreover, GoPro's $100 discount taken on the product last week is a red flag not only about demand, but also on the company's ability to create the type of premium innovation needed to justify the stock's valuation.
GoPro has added a ton of employees in the past year, and these folks need to be developing the next wow gadget to justify the investment in them. An added concern here: competition in that $299-$399 tech category this holiday season from a barrage of smartwatches, from Apple (AAPL), Google -- now Alphabet (GOOGL) -- and Samsung.
