Emerging Markets & Interest Rates.

Business Insider posted two charts today showing why emerging markets have been clobbered recently.

The first chart shows the recent rapid back up in interest rates.  This has been a rapid increase with a ripple that has been felt in all sorts of different asset classes.  For example, the bond mutual funds that I follow have lost between 1-2% in the past month.  It has been worse for other areas of the bond market.    We've been warning for quite awhile that this could happen to bonds.  See here, here, here and here for  my thoughts over the past year or so.

Which brings us to the 2nd chart again courtesy of Business Insider and James von Simson via Merrill Lynch:

Business Insider thinks that as interest rates declined in developing market all that excess liquidity went into emerging markets looking for higher yield.  Now with rates more attractive in the US and the developing world all that money is rushing back in here.

Not sure I buy that argument although that may be part of the puzzle.  Here's two monthly charts for comparison purposes, both courtesy of Finviz.com.  The first is the iShares MSCI Emerging Markets ETF {EEM}.  Notice that after recovering from its 2008/2009 lows this ETF representing emerging markets has in essence gone nowhere.  This is likely due to the fact that these markets are still feeling the pain from the global slowdown.  Note that EEM has a large exposure to both China and Taiwan.  Chinese ETFs look a lot like this chart.

Now here's the chart of the US S&P 500 ETF {SPY}

Notice that since the end of 2011 the US has been in a bull market, again likely reflecting better economic prospects here.  I think that trend has become much more pronounced in the past few months and has finally been noticed by investors.  Since money flows to where it's treated best it is perhaps not surprising that a lot of it has been coming here.   I don't know when that trend ends.  I will say that probability suggests we are later in the game in this divergence amongst these two areas because the financial press all of a sudden is giving this more attention.

I think a part of a clients portfolio needs to be overseas, somewhere between 5-15% depending on a client's risk/reward perimeters.  That can be a harder sell after three years on under performance.  However, longer term there is higher growth over there than here and having some exposure via ETFs likely makes sense to investors with the right portfolio allocation.  This kind of divergence is beginning to be much more intriguing to me on a longer term basis.

By-the-way take a look at the green bars on the SPY monthly chart.  Green indicates that month was positive.  Since the fall of 2011 when stocks bottomed there have only been three months where stocks have declined {red bars}.  Thats roughly 20 months.  A quick glance at a longer term chart seems to show that you have to go back to the late 1990s to find a similar period like this, although there was a period in 2004-2006 that was close to this.

Link:  Business Insider:  In 2 Charts You'll Understand the Gigantic Tidal Shift in Global Markets.

*Long ETFs related to the S&P 500, emerging markets and China in client and personal accounts.