David Fabian: The recent strength in emerging market countries has caught many investors, including myself, by surprise. There have surely been pockets of strength in thriving economies such as India and Taiwan, but the majority of broad-based emerging market indices have been unable to mount a convincing drive higher. Nearly every rally attempt has been met with resistance that has failed to gain momentum or produce a substantial breakout.
The recent flattening in the domestic markets along with shifts to defensive sectors such as utilities, long-term treasury bonds, and consumer staples may be one reason for the gains in emerging markets. Value seeking growth investors might be finally starting to warm up to the idea that these economies offer a way to diversify outside of the United States and have a great deal of upside potential.
Emerging markets entered the year under heavy negative sentiment that has likely worked in their favor as well. Often times when an asset class is most loathed or feared, it turns around its misfortunes and catches everyone off guard.
According to recent data from ETF.com, the iShares MSCI Emerging Market ETF (NYSEARCA:EEM) has begun to see a jolt of inflows after months of investor redemptions. Through the first three months of the year, EEM lost $7.5 billion in total assets to pile on top of $5.3 billion it lost in 2013. However, this ETF has already gained over $2.5 billion in new money during the first few days of April. That is a significant swing in asset flows in a very short period of time.
From a performance standpoint, EEM has posted a gain of 10% since the beginning of February compared to half that return in the SPDR S&P 500 ETF (NYSEARCA:SPY). An even wider divergence exists between emerging market equities and the iShares Russell 2000 ETF (NYSEARCA:IWM) which has come under significant pressure in recent weeks.
The real test for EEM is whether or not it will be able to push back above its 2013 high and extend these recent gains above the $44 level. If it fails to do so, many critics will point to out that these stocks likely just experienced an oversold bounce in the midst of another lackluster year.