Emerging market equities ready for a sharp upward movement

The MSCI Emerging Market index has formed a Golden Cross for the first time in a year, reflecting the possibility of a sharp upward movement for the market. A Golden Cross pattern takes place when the short-term moving average of an index value moves past the long-term moving average.

It is a crucial indicator used by technical analysts to predict index direction. The MSCI EM index has rallied 20% from late January, and formation of Golden Cross pattern indicates more room for the momentum.

The 50-day moving average of the MSCI EM index stood at 820.3 and 200-day placed at 803.1. A regional analysis shows that most of the major emerging markets are witnessing the Golden Cross pattern following reduced volatility in currencies and rebound in the commodity prices. However, China, India, and Saudi Arabia are yet to show such a pattern.

After lagging in the emerging market rally earlier on, the Nifty index is gradually gathering pace. In the last three months, it gained 11.2% compared with 10.8% of the MSCI EM index. The 50-day moving average in case of the Nifty is currently 3% below the 200-day average. A few other factors are also helping investors to make fresh purchases in emerging markets.

The earnings yield of the MSCI EM index has risen relative to junk bond yield. This makes equities attractive relative to bonds. Also, bearish trades in the form of shorting of derivative contracts by emerging market exchange funds have dropped to the lowest in one and half years.