Investors sentiment is extremely depressed on the back of the "China
deflation trade" with the most cyclical assets trading for some of them
at 2009 levels.
What would I need to go long EM assets ?
Tactical:
1st: Price of EM equities market to start trending up for initiation of 1/3 of long tactical position at an asymmetrical point (correction after small uptrend and close to recent lows)
2st: Key "economic visible indicators" to start losing negative momentum
3st : light positionning cross assets/strategy
Increase in potentially strategic long:
3st : fiscal stimulus + additional eco data to print green numbers: PMI, current account etc..so that it can convince long term investors to accumulate and as a result sustain the uptrend
Why looking at it now ?
Well, EM markets not accelerating in down move any more after significant double digit losses, the most leveraged representation of China bubble is going almost bankrupt (Glencore) - EM FX crosses are devaluating across the board and stop accelerating and central banks are injecting liquidity - at some point, it will have an impact on macro data.
Moreover, as a starter, economic growth and financial conditions are not all at the same level and speed in EM which is a different context that the one of the last decade. Investors seems to focus on China PMIs which seem to be the only "fast and easy and reliable " over there, but actually there is a bunch of other indicators such as real estate prices, business confidence, service PMI that shows that all is not so dark in China. The Chinese Government is trying to deflate post-crisis bubble without too much crashing the economy and we should not expect an easy ride.
Across the EM world - except Brasil - Central banks are accelerating the easing of financial conditions (RBI this morning) to counter falling inflation rates and reduced economic growth.
This is one positive development for economic growth and ultimately risk assets. Additionally, FX is devaluating fast against DV world which is also a positive for both GDP growth and financial conditions.
While most Central banks seems to act against current negative cyclical forces (except Brasil - again..), economic growth is not yet kick starting.
My prefered beta to this story : China and Brasil equities. I m going small net long now.
The best beta to "China Inflation" trade... will be EEM. Stay tuned.
