BIG EMERGING MARKETS AREN'T TRENDING IN THE SAME DIRECTION -- BRAZIL AND RUSSIA ARE RISING WHILE CHINA AND INDIA REMAIN WEAK

EMERGING MARKET ISHARES ARE DOING BETTER... One of our readers asked for a look at how emerging are doing. In general, the answer is okay. Chart 1 shows the MSCI Emerging Markets iShares (EEM) having recently cleared its February high and in a short-term uptrend. The solid line is a ratio of the EEM divided by EAFE iShares (EFA). The direction of the ratio tell us how emerging markets are doing relative to the world's developed stock markets. Although the RS line has been rising since mid-March, its still below its February peak. That means that emerging markets have underperformed developed markets over the last three months. A look at the four biggest emerging markets shows why.

Chart 1

BRAZIL AND RUSSIA ARE RISING... Of the top four BRIC emerging markets (Brazil, Russia, India, and China), the first two are doing very well. Chart 2 shows Brazil iShares (EWZ) recently hitting a new record high. The EWZ/EEM ratio on top of Chart 3 shows that Brazil is an emerging market leader. Chart 3 shows the Market Vectors Russia ETF (RSX) moving up to challenge its December high. The rising RSX/EEM ratio (top of chart) shows Russia to be another BRIC leader. What both of those countries have in common is that they're exporters of natural resources. That means that Brazil and Russia are benefiting from the continuing commodity boom. That's not the case with China and India.

Chart 2

Chart 3

CHINA AND INDIA ARE EMERGING LAGGARDS... What China and India have in common is that they're importers of natural resources. That may partially explain why they've become emerging market laggards. Chart 4 shows the FTSE/Xinhua China 25 iShares (FXI) having lost nealy half its value from October to March and is still 30% below its old high. It's also meeting resistance at its 200-day average. The FXI/EEM ratio (bottom of chart) has been falling since October which makes China a global laggard. Rising commodity prices (and a relatively low yuan) are causing China's inflation rate to rise to a point where the Chinese central bank is taking steps to slow it down. India has done almost as badly. Chart 5 shows the MSCI India ETN (INP) still 40% from its January high and trading well below its 200-day line. The INP/EEM ratio has been in a downtrend since January. I suspect that the relatively poor showing by emerging markets since the start of the year is due mainly to weakness in those two giants. As long as commodity prices keep rising, Brazil and Russia will probably remain emerging global leaders.

Chart 4

Chart 5

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