FALLING COMMODITIES AREN'T DRIVING EMERGING MARKETS HIGHER -- TECHNOLOGY IS -- THAT'S ESPECIALLY TRUE IN SOUTH KOREA AND TAIWAN WHICH ARE EEM LEADERS -- TAIWAN SEMICONDUCTOR IS LEADING SEMICONDUCTOR ETF TO NEW HIGHS
COMMODITIES DIVERGE FROM EEM... One of the long-held principles of emerging market behavior is that they're closely correlated to the direction of commodity prices. That's because several large emerging markets are exporters of commodities (like Brazil and Russia). China is the world's biggest importer of commodities. Emerging markets are currently the strongest part of the global stock market. Their 2017 gain of 16% outpaces foreign developed market gains of 12%, and 7% for the S&P 500. Chart 1 shows the MSCI Emerging Markets iShares (EEM) rising to the highest level since spring 2015 (red line). The brown line plots the Bloomberg Commodity Index ($BCOM). After bottoming together at the start of 2016, both markets rose and fell together for most of last year. Not this year. Since mid-February, the commodity index has fallen -7% while the EMM has gained a similar amount. The weakest EEM stocks since February have been commodity-related ETFs in Brazil (1%), China (1%), and Russia (-4%). Russia has been hit especially hard by falling energy prices. We have to look elsewhere to explain what's driving EM stocks higher.
(click to view a live version of this chart)
Chart 1
IT'S TECHNOLOGY... A good case can be made that gains in the technology sector are helping drive the emerging market rally. Chart 2 shows the Technology SPDR (XLK) and EEM rising together over the last four months. Since the start of the year, the 60-day Correlation Coefficient between the EEM and the XLK has gone from negative to a strong reading of 78% (below chart). Here's a reason why. Six of the ten biggest stocks in the EEM are technology related, making technology the biggest EEM sector (17%). [The next biggest is 2.4%]. The three biggest EEM countries are China (26%), South Korea (15%), and Taiwan (12%) where those big tech stocks are located. South Korea's Samsung Electronics is the biggest EEM stock (4.5%). China's Tencent Holdings and Alibaba are the second and fourth biggest (3.9% and 2.9%). Taiwan Semiconductor has the third biggest weight (3.6%). Those numbers show a heavy technology component in EEM iShares, and explains why rising technology stocks appear to be benefiting EM markets.
(click to view a live version of this chart)
Chart 2
SOUTH KOREA ISHARES ... It's not hard to see what's currently driving big gains in emerging Asia. Chart 3 shows MSCI South Korea iShares (EWY) rising above its 2014 high to reach the highest level in nearly ten years. It's also leading emerging markets higher. It's 23% gain this year makes it the biggest country gainer in the EEM. The EWY/EEM ratio (top of chart) is also nearing an upside breakout. Samsung Electronics is its biggest stock (24%). Taiwan isn't far behind.
(click to view a live version of this chart)
Chart 3
TAIWAN ISHARES HIT NEW RECORD -- TAIWAN SEMICONDUCTOR LEADS SMH HIGHER... Chart 4 shows Taiwan iShares (EWT) hitting new record highs. Its 2017 gain of 17% puts it just ahead of the EEM (16%). Taiwan Semiconductor (TSM) is its biggest stock (23%). Bringing this a little closer to home, TSM is also the biggest stock holding in the VanEck Vectors Semiconductor ETF (SMH) at 12%. It's also one of the leaders in the SMH. Chart 5 shows Taiwan Semiconductor (bars) leading the SMH to new highs. [Semiconductors are one of today's strongest technology groups]. TSM has outpaced the SMH during 2017 by a 22% to 13% margin. That certainly shows a link between the Taiwan stock market and rising semiconductor stocks traded in the states, and vice versa. All of which seems to support the view that the recent popularity of technology shares on a global basis is helping drive funds into Asian emerging markets. And that, in turn, is helping support rising technology stocks here.
(click to view a live version of this chart)
Chart 4
