by Bryan Perry

January 5, 2021

Last year’s historic “pandemic rally,” which took the major indexes to new all-time highs, was something that very few market gurus called in advance. Certainly not the Wall Street analyst community, which was very guarded in their analysis up until the start of November, when the Fed reiterated its mandate to provide unlimited support to the credit markets. That’s when investors bought into a done-deal trillion-dollar stimulus package that Congress would deliver, plus a vaccine that was forthcoming within weeks.

Admittedly, the highest-profile stock market stories were, and still are, centered on U.S. companies, save for a handful of Chinese EV stocks. But as awesome a year as it has been for FAANG and MAGA stocks, cloud kings, semis, sizzling unicorn IPOs, and a massive wave of M&As, there is also serious bullish rotation taking place with international stocks that haven’t been worthy of cocktail party chatter for years.

Take the Japanese market for instance, which trades at levels not seen since 1997. We’re talking about a country with negative population growth where over a third of its citizens are above the age of 60.

Tokyo Nikkei Average Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Japan’s debt-to-GDP ratio is 236%, the highest among Fitch-rated sovereigns, with the Bank of Japan being the largest buyer and owner of its debt. Its 10-year sovereign pays 0.0% but the yen has rallied anyway. Since almost all Japanese government debt is owned by its central bank and Japan’s financial system, investors believe it won’t default on itself, so the Bank of Japan’s QE goes on and on.

Granted, Japan is home to leading-edge technology and has a major presence in all manner of heavy industry exports, but their aging demographics, soaring debt-to-GDP ratio, and the fact that its own central bank has to load all that debt onto its own books is a unique set of circumstances.

The current school of thought among global equity markets is that the Fed, BOJ, PBOC, ECB, and emerging central banks can keep this rising velocity of money going indefinitely with the understanding that if their debt isn’t bought up in the open market, it will be absorbed on their own balance sheets.

It also assumes that global short-term interest rates will be near zero for the next 2-4 years, theoretically enough time to restore surplus tax revenues to balance budgets from a roaring global economy that would enable the winding down of QE and the eventual tightening of fiscal policy. Yeah, right! (At this point, insert the sound of a broken record – a needle scratching a vinyl surface, if you remember that sound.)

So, if Tokyo’s Nikkei index can rally big under these conditions, it’s hard to bet against Japan or Europe, or for that matter global stock markets, because investors are of the growing view that central bank QE has moved from a temporary stop-gap tool to being a permanent feature in monetary policy. This would seem to explain a lot of why markets continue to rally, unabated, despite their seemingly rich valuations.

Here’s an outlier. How are investors to understand why Turkey’s stock market, the BIST National 100, hit a fresh all-time high this past week of 1,482 when the Turkish Central Bank raised its key lending rate from 15% to 17% last week to slow down inflation and protect the currency? The central bank holds some 75.6 billion lira ($11.14 billion) of government debt as of June, up from 19 billion lira at the end of 2019. That’s a 298% increase in debt holdings in one year – yet the stock market just hit an all-time high?

BIST National 100 Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While this is a microcosm of one small market, compared to a developed nation many times its size, it’s amazing to see what’s happening in Turkey – it defies most economic theory taught in leading business schools. Such monetary policy was the death of past stock markets, but apparently not today. And so, rather than try to get angry with the system at large, or staying in cash, investors are running with it.

As I’ve said in many if not every investment policy meeting I’ve attended: “It will keep working until it doesn’t.” If this QE-fueled march to higher highs is to continue in 2021, there is a multi-year breakout occurring in the emerging market indexes that could point to where real outperformance lies ahead.

Emerging markets have some strong tailwinds working for them. Most have GDP growth tied to the export of commodities. Developed countries have devalued their currencies, resulting in stronger purchasing power from emerging economies. And central banks of emerging markets have spent decades trying to prove they are good stewards of their money supply, due to the volatility of commodity prices.

Hard and soft commodity prices are trending solidly higher, following years of depressed prices. The CRB Index has rallied 59% since the March low but it is still way off levels seen in the past 15 years. To say there is room to run is a gross understatement. The CRB index comprises a basket of 19 commodities, with 39% allocated to energy, 41% to agriculture, and 20% to industrial and precious metals.

Commodities Research Bureau Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The professional financial world is so awash with cash, credit, and confidence that waves of fund flows should move into inflation-sensitive assets from pure diversification into non-correlating assets to lower portfolio beta. This is where emerging markets should shine, if this initial rally starts to feed on itself.

The iShares MSCI Emerging Markets ETF (EEM) is the most widely held and heavily traded ETF that tracks the underlying index. From the 25-year chart below, EEM looks to be in a position to challenge its 2007 high, but maybe not before a well-deserved 10% to 15% pull back occurs first. This would have EEM testing its key support level, providing what could be a timely entry point.

iShares MSCI Emerging Markets Exchange Traded Fund Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

EEM has been building a base for 13 years, with each correction being shallower than the previous one.

I am considering adding some international exposure in 2021. It just might steal the show by this time next year.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
This is “The Fed’s Rally”

Sector Spotlight by Jason Bodner
The Calendars May Change, But Most Things Stay the Same

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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