Wednesday, July 10, 2013

The IMF reduced its emerging markets growth forecast yesterday and the emerging markets rallied.  Maybe because Citigroup forecast a 27% gain in the MSCI Emerging Markets Index for the next 12 months saying the bad news is already priced in.  That’s the index tracked by iShares’ Emerging Markets Fund (EEM) and it happens to be at 9th place today, its highest rank this year.  It is no stranger to the elite ranks however, having first reached the top 10 on September 10, 2012 after a couple of months in the top 25.  It spent most of last fall in the top 10 which was a great call for Quant as the fund went on to outperform most others until it dropped out of the top 100 for the first time on December 21st

We have had our eyes on it since the spring and are happy to see it back up top.  We mentioned it in April as it emerged back into the top 25 on strong sentiment scores.  The bears were right then as it went on to suffer another leg down in June.  Its sentiment score remains elevated at 82.2 today but it also now enjoys a healthy 70.1 Fundamental Score reflecting its better valuation after the June swoon.  We would prefer to see a technical score better than today’s 50.3 but it all combines with a mediocre Global Theme Score and a strong Quality Score for today’s Total Score of 68.  The Diamond models give it an 8.95 Reward Rating with a higher than average 5.47 Risk Rating driven by high volatility and deviation risk.

Asia leads EEM’s geographic exposure with 25% of AUM in South Korea and Taiwan and another 10.1% in China which may restrain it today.  The other BRICs make up about 25% but there are plenty of colorful slices on its pie chart showing ample diversification across geographies and industries.  Yesterday’s gain established the fund’s first higher low this year so we have high hopes for that technical score to improve along with higher prices.  Quant has called EEM very well and its 9th place rank today suggests it may be time to dip your toes back in those emerging markets waters.  No offense to the IMF, but their predictions have not been as reliable. 

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