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Emerging Markets - No Bears Yet in Sight

9 December 2019Emerging MarketsEquities

EM Bear Market Checklist: Citi's Global Bear Market Checklist has been popular amongst investors, and Citi analysts have recently created an Emerging Markets (EM) version. This helps compare current variables to those before previous major bear markets (1997, 2000 and 2007). To be clear though, this is not a market timing tool.

As the bull market enters its 11th year in 2020, are there flashing red signals? At present, only 2.5 out of 18 factors are flashing red in the EM Bear Market Checklist. This compares to 11.5 in 1997, 14 in 2000 and 12.5 in 2007. This EM checklist is more sanguine on the prospect of an imminent bear market than Citi’s global checklist, which is presently at 4 out of 18.

Emerging Markets - No Bears Yet in Sight
Past performance does not guarantee future results, real results may fluctuate.

What to watch for: EM analyst sentiment is more bullish than their DM counterparts, which Citi uses as a contrarian indicator. Citi analysts are also watchful of US yield curve inversion, which has historically indicated previous US recessions, earnings collapse and global bear markets. Chinese private sector debt is also running high at over 200% of GDP.

The positives: EM equity valuations look less frothy than before previous major bear markets. MSCI AC Asia ex Japan is currently trading on a trailing PE of 14x, slightly below the long-run median. Measures of corporate behavior such as growth in capital expenditure, M&A and IPOs activity also looks subdued compared to previous highs. All in, signs of classic end-cycle euphoria remain elusive.

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