SIA Equity Leaders: EAFE crushing EEM since 2012
For this week’s SIA Equity Leaders Weekly, we are going to take a closer look at an important change within the International Equity Universe and more specifically, a trend change in regards to the comparison of Developed and Emerging markets which has occurred since the beginning of 2012. We will examine this trend to see if a potential continuation of this trend will resume going forward. We will focus on looking at the major emerging market, China, through the Ishares China Large Cap ETF (FXI). Then we will look at the comparison chart of the iShares MSCI Emerging Markets ETF vs. iShares MSCI EAFE ETF (EFA).
iShares China Large Cap ETF (FXI)
In looking at the chart of the iShares China Large Cap ETF (FXI), we see that since it reached a high of $51.60 back in May of this year, FXI has experienced a significant drop in price. It has recently broken a major uptrend line in early August. With only minor support at $33.38 and, below that, $31.45, it will be interesting to see if China, with its recent stimulus plan, can prop up its economy after economic growth forecasts have been revised down even further for the remainder of the year. Only time will tell if China can re-accelerate their growth and get their economy on track. With an SMAX of only 2 out of 10, it is showing near-term weakness against all asset classes and one should be aware further weakness in price movement could potentially arise.
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iShares MSCI Emerging Markets ETF vs. iShares MSCI EAFE ETF (EEM vs. EFA)
After looking at the chart of the iShares China Large Cap ETF and the weakness that has occurred in FXI, we will draw our attention to this relationship and the effect it’s having in our comparison of Emerging Markets and Developed Markets. In looking at the comparison chart of iShares Emerging Markets ETF (EEM) and iShares MSCI EAFE (EFA), we see a structural change had occurred in 2012. In the attached comparison chart, a rising column of X’s indicates Emerging Markets (EEM) has won the relative battle over Developed Markets (EFA) and a descending column on O’s indicates Developed Markets has won the relative battle over Emerging Markets.
After a significant drop in Emerging Markets beginning in 2012 and into the first half of 2013, we have seen the relative battle has been fairly even between the two markets up until earlier this year (with the exception of a brief period in the second half of 2014). Since June, we have seen a major support level broken for Emerging Markets and a new leg down has ensued. We have not seen levels such as these since 2008. With a VS. SMAX score of 3 out of 10, that potentially indicates further weakness in EEM and perhaps a further move down in the comparison chart which would favor Developed Markets moving forward. One must take note of this significant resumption of trend favoring Developed Markets over Emerging Markets with the overall risk in International Equity from an asset class still high, it is still important to understand which area within this asset class still potentially gives you the best opportunity moving forward.
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