One of the fascinating things I have learned in this market: Avoid PE (Price to Earnings) talk. It makes no sense. It is not a predictor of when stock will make a move and focusing on it only adds to the confusion. Let's take one example: Emerging Market MSCI EEM
Emerging market MSCI EEM has been stuck in a no decisive move zone since 2011 despite so much cheap Valuation talk. EEM was trading at 41.25 in Dec 2011 (It's trading at 41.2 today)
Crap talk in 2012:
“Equity valuations look attractive across the emerging markets, as price-to-earnings and price-to-book-value ratios remain below historic long-term averages"
Hope talk in 2013:
Even a broken clock is right twice the day. This crap and hope talk continued till 2016. Yeah PE is low but EEM remained stuck in this range
Here's what makes any asset move:
People don't buy cheap assets...they buy assets where future looks promising
Talk in 2017: There is cyclical economic recovery happening across the world. A classic reflation trade is working in favor of Emerging Market. And it's playing out in a classic textbook fashion.
The Global recovery trade theme started gaining momentum in January 2017 and EEM made a strong comeback. All it needed was a small push above 37.5
The Most important chart to keep an eye on: MSCI EEM pic.twitter.com/RwjfwxudFx
— Deepak Singh (@smarket) February 6, 2017
The breakout happened and see where EEM is today
The Chart in 2017 looks super attractive
So for 5 years - all the cheap Valuation talk did not help but then one growth comeback hope and EEM is on verge of major move. What works: Not how Cheap or expensive asset is BUT how optimistic market is about the future?
How much more EEM can rally for now?
It can easily rally up to $45 - it's previous resistance
The real momentum Bull market in EEM will start above 45
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers