Bear market rally in US to give way to EM outperformance?

Since June 16th, the S&P 500 has been on a tear, up 10.2% vs MSCI EM’s -0.3%. The ongoing question in the US is whether the bear market ended in mid-June and we are in a new secular bull market, or the current move is just a bear market rally. We believe it is the latter, and that there will be more corrections in the coming weeks and months for the S&P, as we have seen the past few days. During this summer rally, only India in EM moved up strongly, outpacing the gains of US equities. China, struggling with sporadic lockdowns and a weak property market, slid -5%.

MSCI EM troughed a month later, on July 15th. Over the past month, EM equities are +3.6%, with Brazil being the biggest mover at +19.8% and China continuing to be one of the worst at -2.4%. Saudi was also strong at +13.5%, which is interesting as Brent crude was down nearly 19% during the period. In looking at correlation data, on a three-year basis, India has by far the highest correlation to the S&P 500 at 0.97, followed closely by Taiwan. If the S&P 500 continues to correct, then it is a safe bet that Indian equities will start to correct as well; India is also the most expensive EM equity market. We believe EM equities overall, however, should hold up better.