Emerging Markets Beginning to Move

Emerging markets outperformed US markets for the second week in a row and gained some steam over the prior week’s out performance. The MSCI emerging markets index was up 6.41%, nicely ahead of the S&P 500 index rebound of 4.71% for the past seven days. It appears that the markets are taking a breather on some of the issues that have been of concern.

Fed rates and impact on currencies. The market has strengthened confidence over where the Fed is headed: Fed futures pricing suggest no increase until 2016. If the Fed does not increase rates, borrowing costs continue to remain cheap, limiting detractors to growth.

With the feeling that the Fed is not going to raise rates this year, foreign currencies have strengthened over the past month. Consider the trough of the following currencies against the USD over the past month versus where the currencies are today. Whereas 1 South African Rand would have cost investors barely over $0.07 cents on September 28, today it costs over $0.075. Likewise, whereas 1 Brazilian Real would have cost investors less than $0.24 on September 23rd, today it costs over $0.26.

Figure 1. South African Rand versus USD

Source: Bloomberg

Figure 2. Brazilian Real vs. USD

Source: Bloomberg

Commodity trends. A number of regions outside the US tend to be rich in natural resources, including Africa and the Middle East. We note that commodities remain volatile but have shown some signs of stabilization, including oil and copper (with the miners of the latter having reduced output).

Figure 3. Commodity Futures Price Quotes for Crude Oil WTI (NYMEX)

Source: NASDAQ

Figure 4. Commodity Futures Price Quotes for High Grade Copper

Source: NASDAQ

Valuation. Emerging markets look attractive to investors on valuation. Note the following discounts between the World Index and Emerging Markets across price to earnings and price to book, both today and over the 10-year period.

Figure 5. Market Valuations As of September 30, 2015

Conclusion. While we think the last couple weeks have shown some encouraging trends that could continue through the quarter, we expect the markets to remain volatile, especially as we enter in 2016 and the Fed rates issue bounces back into investors’ minds. Given this outlook, we think actively managed funds with a long-term perspective will be critical for investors’ portfolios and believe investors should consider this opportunity to allocate to Nile. 

The views expressed are opinions subject to change and are not investment advice

Nile Capital Management

We Know Africa: From Cairo to Cape Town

For more information please call 646-367-2820