Emerging markets stocks had a long run vs. large cap U.S. ones. Now they’re starting to underperform, as measured by a chart of the iShares Emerging Markets Index (EEM) ETF vs. the SPDR S&P 500 (SPY) ETF.
When traders are more risk averse and anticipating global slowdown, they will tend to seek the relative safety of large cap stocks in the world’s largest economy. That will show up as SPY outperforming EEM.
What we’ve seen lately (above) is that, despite very rapid economic growth in Asia and South America, EEM has stopped outperforming SPY.
The chart below from Trader Feed tracks relative performance between the two ETFs, starting as a base 100 level.
Thus at the peak, EEM outperformed SPY by 35%, but now has given back a substantial amount of this outperformance since early January. This confirms the view that consensus doesn’t expect the current pace of economic growth, to sustain itself, given that the world just experienced a sharp V-shaped rebound in the aftermath of a sharp fall. (ie. growth rates are expected to slow, but not collapse)
Consensus now expects growth to slow, plus also might be switching into better relative values in the U.S. stocks, given U.S. underperformance vs. emerging markets.
From a U.S. investor fund flow perspective, where international stocks have been favoured over U.S. stocks during the last year, this means it’s likely we could now see increased flows into U.S. stocks since we’ve yet to see all the money which fled during the crisis come back.
Business Insider Emails & Alerts
Site highlights each day to your inbox.