Headline Risk Says What? 18 Emerging Markets That Are Troubled

10/02/2018 4:32 pm EST


Landon Whaley

Editor, Gravitational Edge

One aspect of headline risk in financial markets is when those headlines bring “guru” risk along. The media loves to trot out an “expert” to do their best Babe Ruth impersonation and call the market shot, says Landon Whaley. He's presenting at MoneyShow Dallas Oct. 4-5.

Case in point, back on June 7 CNBC trotted out JP Morgan’s Global Head of Derivatives and Quantitative Strategies, Marko Kolanovic, so he could “give his prediction for the summer.”

You might be asking, why do we care what this guy said four months ago? Because the clip is the textbook definition of guru-related headline risk and now with hindsight we can see how his prognostication skills fared.

Marko’s opening salvo was to buy emerging markets because he felts “some of these moves have been too large” referring to crash mode being experienced by many equity markets in emerging economies.

Marko goes on to say that he believes the EM issues is more idiosyncratic, focused primarily on Brazil, Turkey and Mexico rather than being a systemic issue across all EM. There is nothing “idiosyncratic” about 18 emerging market economies we track being in either a FG3 or FG4 environment for the better part of 2018. Yes, Brazil and Turkey are in FG3s but so is Russia, South Africa, Argentina, Portugal, and Indonesia, just to name a few.

Marko said it was a good idea to have EM in the portfolio as a diversifier because the current correlation of EM equity markets to developed markets is at a multi-year low and because he “believes in the continuation of this global growth.” News flash Marko, global growth had been slowing for the better part of 6-8 months when you made this statement and the slowdown has only kept going afterwards.

For the record, the “globally synchronized recovery” Wall Street has been touting since Q2 2017 is as dead as a door nail, they just haven’t acknowledged it yet. 

This Fundamental Gravity-based reality of global growth slowing is why EM and developed markets alike have provided no such upside or de-worsification benefits since this guy’s call on June 7:

  • South Africa is down -10.8% since the call and has experienced a -18.3% drawdown to boot.
  • Turkey is down another -24.7% since the call and experienced a -38.9% drawdown.
  • South Korea is down -8.2% and has experienced a -14.5% drawdown since Marko’s call.
  • It’s not just “idiosyncratic” factors impacting just a few economies, the broad based MSCI Emerging Market Index is down -6.8% with a -10.8% drawdown.

Developed equity markets are also behaving in line with their bearish Fundamental Gravities:

  • Chinese equities are down -10.0% since Marko put on his Babe Ruth jersey, with a -15.5% drawdown.
  • German equities are down -3.1% and have experienced an -8.9% drawdown.
  • United Kingdom equities are also down -3.1% with an -8.7% drawdown.
  • Here again, its not idiosyncratic to just a few economies, the All World (ex U.S.) index is down -1.8% since the call with a -6.4% drawdown.

All the while, the U.S. equity market is up +5.5%, with just a -3.0% drawdown. Why in the world would you allocate equity exposure away from a FG2 environment (the U.S. all year) towards equity markets in FG3 and FG4 environments?!


The headline risk bottom line is that following gurus is dangerous business. Yes, these guys and gals often have very impressive titles like “Global Head of Derivatives and Quantitative Strategies” but that doesn’t mean they’ve got this market thing on lock down.

All year, we’ve had you out (or opportunistically short) every equity, fixed income and currency market on Earth outside of the U.S. That view point has been in place since the beginning of the year, and we will maintain that perspective until the data tells us otherwise.

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