Capitulation Signs in Emerging Markets

The current state of emerging markets is showing signs of capitulation. Stocks in these markets are currently at their lowest level in relation to the U.S. since 1971.

Decline in Emerging Markets

The iShares MSCI emerging markets ETF (EEM) has experienced a decline of 1% this year, while the ETF SPY, which tracks the S&P 500, has seen a 13% rise.

Redemption in Emerging Market Debt and Equities

Bank of America strategists, led by Michael Hartnett, have observed not only a drop in prices but also the largest redemption in emerging market debt and equities since June 2022.

Struggles of Emerging Markets

Emerging markets, particularly China, are currently facing difficulties in maintaining their previous rapid pace of growth. In contrast, the U.S. economy has been growing much stronger than anticipated.

Contrarian Entry Points

Hartnett and his team believe that there are significant “secular contrarian entry points” not only in emerging markets but also in gold, small-cap stocks, value stocks, and banks. They specifically highlight that U.S. banks are trading at their lowest levels relative to the S&P 500 in 80 years. Additionally, financials have experienced their largest outflows in 13 weeks.

Hope for Regional Banks

There is hope for regional banks, as there was a rally observed for regional bank stocks (KRE) on Thursday. This rally was fueled by optimism surrounding the possibility that long-term Treasury yields have reached their peak.

Cash and T-Bills Allocation

Interestingly, among Bank of America’s private clients, there is currently a high allocation to cash and Treasury bills (T-bills), with 15.8% in this category. This reflects a position known as “T-bill and chill,” which has gained popularity.

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