Emerging markets have been on quite a tear this year. Just as pretty much everyone gave up on the asset class, the emerging markets ETF (EEM) made a low in December and has rallied by over 16% since.
The question now is whether or not the sector has reversed its multi-year downtrend relative to the United States. The chart below shows the relative strength of emerging market equities compared to the S&P 500 using the ratio of ETFs EEM (emerging market ETF) and SPY (S&P 500 ETF) as a proxy. When the line is rising, it indicates that emerging markets are outperforming the S&P 500 and vice versa when the line is falling. In spite of the big run in emerging markets over the last four months, it barely registers when looking at a two-year chart of the sector's relative strength versus the S&P 500. Additionally, the recent high in the ratio still has yet to clear the low in the ratio from 2013. That being said, the downtrend from the late 2012 peak has indeed been broken. While you should probably wait until the prior low in the ratio from late 2012 is cleared, if the turn for emerging markets is truly here, there is a lot of room for additional upside just to erase the relative weakness from 2013.
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