Global Emerging Markets Strategy October Recap – Pause:: Citi

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Global Emerging Markets Strategy
October Recap – Pause

 Pause — Since the October 14 cycle high, MSCI GEMs has fallen back by 1.9%;
still, the asset class registered a full-month increase of 2.8%, respectable
following the best September on record (+10.9%) and flat returns for October on
average over the past 20 years. AC World rose by 3.5% last month; the
expectation of QE2 led GEMs to underperform for the first month since Feb 2010.


 Neck-and-Neck Performances — EMEA led in October (+3.2%), followed closely by
Latam (+3.1%) and Asia (+2.6%). The three best-performing EM countries were
Latin American: Peru (+16.6%), Mexico (+8.1%) and Colombia (+5.9%). Only
Egypt saw negative returns (-0.7%). Among the largest 7 markets, Russia
(+4.9%) and China (+3.9%) rose the most while Brazil (+1.2%) underperformed.

 Domestic Cyclicals Push On — In terms of sectors, Consumer Disc (+4.7%) and
Financials (+3.9%) performed best, while defensive Utilities (+0.6%) and Info
Tech (+0.7%) lagged. Materials and Energy rose by 2.7% and 2.6%, respectively;
Industrials outperformed (+3.8%), while Telecom underperformed (+1.8%).

 Curbing Inflows — Regional currencies rose by just 0.6% in October, according to
our FX proxy, down from +3.4% the prior month, as the dollar’s fall slowed and on
measures by several EM economies to curb FX appreciation. EM bond prices rose
by less in October than previous months (EMBI+ yields fell 16bps to another
record low of 5.28%). Flows into EM equity funds eased back by end-month.

 Strategy — We maintain our bullish view of emerging market equities for the next
12-15 months; liquidity will likely continue to flow into emerging markets, and our
view is that GEMs trading at 11.4x forward earnings and 2.06x P/B are not in
bubble territory. We remain Overweight in Asia, Neutral in Latin America, and
Underweight in EMEA.