Over the weekend, we highlighted that even as the US stock market has been grinding relentlessly higher, the big story of the summer have been the "rolling bear markets" observed across numerous asset classes, with EM equities, copper and European banks all experiencing bear markets, while EM FX carry has unwound almost all of its post-2016 gains.
As Bank of America showed, non-US equity markets have underperformed the US the most over a 3-month period since the global financial crisis, and notes that "the underperformance of non-US equities to US equities is reaching levels normally only exceeded in bear markets."
In discussions with clients, Bank of America said that they remain confused because at the same time as the US stock market continues undaunted to new record highs, spurred by the ongoing US economic growth and stellar corporate earnings, the abovementioned bear markets are almost always associated with recessions, so "the key decision investors have to make is whether a recession is looming or whether the cycle has a good deal further to run", or in other words - how close are we to the end of the cycle?
And while we won't know the answer until well after the fact, with developed markets still an oasis of stability, attention predictably remains very much in focus on Emerging Markets, with several countries - especially Turkey, Argentina, Indonesia and Brazil - seeing rapid currency devaluation and some requiring financial assistance.
Still, as SocGen's Andrew Lapthone writes, "equity market performance cannot be described as a disaster. Yes, Emerging markets lost 2.9% last month (in USD) and have been hovering around bear-market territory for the last couple of weeks, but performance looks orderly, albeit negative."
Or maybe not, because if one scratches beneath the surface, "the metrics look increasingly weak" according to the SocGen strategist, and notes that equal-weighted average EM performance has fallen around 10% in the last three months, whilst DM is flat (left chart below). Importantly, as it tends to be self-feeding, the worst performing quintile of EM stocks (see bottom-right chart) is down around 30% in USD (or 26% in local).
And while we already discussed the near record divergence between US and non-US stocks as Emerging market angst continues to not be felt in the headline indices, it is clearly visible in the more economic sensitive Value space. Lapthorne, whose core competency is tracking market factors, highlights that value factors tend to reflect distress wherever it may be and have a strong negative correlation to bonds and a positive correlation to global economic sentiment.
So not only has Value performance been particularly weak over the last 3 months (and bonds have been stronger), but Value stocks are valued at recessionary levels.
In short, "the Nasdaq is flying higher whilst Value and Emerging markets languish." Which, the SocGen strategist concludes, "for those with longer memories may feel not too dissimilar to where we were 20 years ago."