By Philip Lawlor, head of Global Investment Research
Our research shows investor sentiment toward emerging and developed markets has decoupled, coinciding with the recent stretch of EM outperformance. What's behind this unusual divergence?
Select FTSE Russell Composite Sentiment Indicator (CSI) Z-scores
Source: FTSE Russell / Refinitiv. Data as of July 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Our proprietary Composite Sentiment Indicators use Z-scores ranging from 1 (extremely oversold/confident) to 5 (extremely overbought/fearful) to measure how much a current reading is above or below the long-term average. We monitor extreme high or low CSI readings for clues of possible turns in market direction.
After peaking at levels of high optimism (above 4) in late January, CSI scores for the Russell 1000, FTSE World ex USA and FTSE Emerging all plunged to extreme pessimism or fear (1) through late March. (As noted in an earlier blog post, a contrarian investing approach that lightened equity positions as indicators peaked in January and topped up positions as it neared March lows would have been fruitful.)
As the chart above shows, investor confidence tends to be highly synchronous across markets. But, in an unusual twist, scores for the FTSE Emerging Index have soared back to the optimistic highs last seen in January.
Fundamentals drive EM/DM sentiment divide
Recent EM outperformance likely reflects the relatively better job many of these countries have done (led by China) in managing their re-openings and jump-starting their economies than their western counterparts (the US, in particular), while keeping a lid on coronavirus transmission. IMF forecasts look for developing economies, in aggregate, to endure shallower recessions than their developed peers this year and among the fastest recoveries in 2021. Recent US dollar weakness versus most EM currencies has also helped.
The collective EM earnings outlook is also relatively stronger. Consensus EPS forecasts for 2020 have been universally slashed over the past three months. However, analysts continue to project modest gains for emerging markets, versus deep profit recessions for developed-market peers. Expectations for robust EPS growth rebounds in 2021 have continued to rise over the past three months, with the Emerging Markets at the head of the pack.
Regional consensus EPS growth forecasts (%) – current vs three months ago
Source: FTSE Russell / Refinitiv. Data as of July 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Subscribe to our blog.
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.