Mexico ETF Leading The Way For Emerging Markets (VWO, EWT, EWY, EZA, EWW, EWM, IDX)

Michael A. Gayed:  The emerging markets in the BRIC group — Brazil, Russia, India and China — remain drags on the global asset class, but their counterparts elsewhere in Asia and Latin America are cementing their leadership.

We regularly compare the nations of China, Brazil, South Korea, Taiwan, South Africa, Russia, India, Mexico, Malaysia and Indonesia against the broader Vanguard Emerging Markets ETF (NYSEARCA:VWO) to see where momentum is picking up and where it lags.

This is done by showing the trend in the country’s price ratio relative to the broader Emerging Markets ETF. A rising price ratio means the numerator/country is outperforming (up more/down less) the denominator/VWO.

Notice that Taiwan (NYSEARCA:EWT) has dropped off this week’s list of leaders. This technology-rich market weakened substantially last week and is now a broken laggard, effectively erasing the gains we saw two weeks ago.

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South Korea  (NYSEARCA:EWY) is seeing its recent strength continue, but we seem to be approaching resistance in the weeks ahead. Euphoria surrounding Korean technology giant Samsung ahead of its earnings seems to be in the foreground here. If this rally fails to broaden out, this key global market could hit a wall — and since Korea accounts for 15% of the global emerging markets funds, as EWY goes, so goes VWO.

South Africa (NYSEARCA:EZA) rejoins the list of leaders after last week’s currency-oriented moves dragged on Johannesburg’s performance relative to the rest of the global market. While the ratio’s recent move upward looks convincing, it is unclear as yet just how persistent the move will be — as you can see, EZA’s correlation to the global emerging markets has been volatile in the past. So far, the ratio does seem to have support.

Mexico (NYSEARCA:EWW) has gone vertical in terms of its performance relative to the global emerging markets. Since March 23, EWW has surged 4.2% on the strength of its close relationship to the U.S. economy, compared to a tepid 1.6% bounce in VWO over the same period. Sadly Mexico accounts for under 5% of global emerging market funds, so this spike is largely lost in the overall trend.

Malaysia (NYSEARCA:EWM) remains a solid but quiet outperformer. Once again, the sector weight here remains unique in the emerging world: exposure to both consumer stocks and commodity stocks is relatively thin. The banks are still heavy here and the industrial side of the fund is still very difficult for U.S. retail investors to trade in any other vehicle.

Indonesia (NYSEARCA:IDX) picked up steam this week with a strong move; arguably the strongest anywhere but Mexico. This is a significant reversal in relative sentiment and could easily undo the weakness we saw in Jakarta early year.

Conclusion: BRICs (Brazil, Russia, India, and China) continue their underperformance within the Emerging Markets space. Given the heavy weighting BRICs have in most emerging market ETFs, near-term sentiment towards emerging economies may continue to sour until a baton transfer occurs.

BRIC simply needs to pick up leadership again in order to give the broad portfolios a chance against their rebounding counterparts in the developed world.

by Michael A. Gayed CFA for Emerging Money.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.

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