relates to Emerging-Market Stocks to Face Seven-Week Rally Litmus Test

Photographer: Patrícia Monteiro/Bloomberg

Emerging markets may have their work cut out sustaining one of their strongest final quarters in more than a decade.

Prospects for a U.S. stimulus windfall, a successful roll-out of Covid-19 vaccine programs, a commodity-price boom and even a possible Brexit trade deal were enough to keep the rally on course last week. Indexes of stocks, currencies and bonds registered their seventh successive weekly advance, taking the gain on the MSCI Inc. equity gauge since the end of September to more than 17%.

But therein lies a warning. On the two occasions in the past five years when stocks have clocked up such a string of weekly gains, the rally has sputtered. What’s more, as of last week, the gauge was at 15 times the projected 12-month earnings of its members, hovering at the 98th percentile of its valuation range of the past decade. And its 15-day relative strength index has been close to or above overbought levels for more than two weeks.

“Navigating markets was extremely challenging in 2020, and 2021 should prove similarly complicated,” Societe Generale SA strategists including Jason Daw in Singapore and Phoenix Kalen in London wrote this month. “Right now, the market is filled with euphoria, and that is the path of least resistance, but various events could upset the apple cart.”

Bearish Bets Lurk Beneath Emerging-Market Veneer of Confidence

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