Emerging markets (EM) is one area we contine to like in 2018 as a place to pursue alpha. As we noted in our Outlook 2018: Return of the Business Cycle, this group has solid fundamentals, modest valuations, and an opportunistic demographic backdrop.
The country breakdown of the MSCI Emerging Markets Index shows that China is the largest component, followed by South Korea and Taiwan.
As we discussed yesterday, we view overall market participation as a sign that future gains are possible, and fortunately we are seeing that under the surface with EM.
Taking a look at the South Korean KOSPI (Korea Composite Stock Price Index) shows a solid technical backdrop. As you can see in our Chart of the Day, the KOSPI consolidated in a nice tight pattern for years before breaking out to the upside in 2017. With all the concerns and worries regarding North Korea, we find this to be an encouraging sign for the second-largest country component of EM and believe there to be potential for future gains.
Turning to the third-largest component country in EM, Taiwan has completed a picture-perfect saucer bottom* that lasted nearly two decades. There’s an old saying in technical analysis, “the longer the base, the higher in space.” Meaning the longer something consolidates, once it eventually breaks out, the move higher could be explosive. Well, the action in Taiwan fits this perfectly, and this is one country that may continue to see market strength.
When reflecting on this chart series, Senior Market Strategist Ryan Detrick explained, “We continue to favor EM, and after looking at the influential countries of South Korea and Taiwan, the underpinnings for the EM rally could very well have significant legs left.”
IMPORTANT DISCLOSURES
The Korea Composite Stock Price Index or KOSPI is the index of all common stocks traded on the Stock Market Division—previously, Korea Stock Exchange—of the Korea Exchange.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
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*A rounding or saucer bottom, is a long-term reversal pattern that signals a shift from a downward sloping to an upward sloping trend. This pattern historically lasts anywhere from several months to several years in duration. Due to the long-term look of these patterns and their components, the signal and timing of execution of these types of patterns tend to be difficult to identify than other reversal patterns.
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