Comparing Emerging Market Selloffs: 2010-2014January 29, 2014
As the emerging world experiences its fifth broad stock market selloff in as many years we thought it timely to review just what happened during the previous four selloff instances so we can have a better idea of what to expect from both EMs and DMs in the current rout.
In the below chart we have plotted the price in USD of the MSCI EM Index (red line, right axis) and also the price of the S&P 500 (blue line, left axis). We also added black lines delineating the beginning of the EM decline and green dashed lines delineating the start of the acceleration, or “waterfall”, phase of the decline. The idea here is to take note of the magnitude and duration of the total decline as well as the “waterfall” portion of the decline. Right below the chart we complied some statistics related to each EM selloff episode from which we’ll make the following points:
- In each of last four EM selloff episodes the total peak to trough decline of the MSCI EM Index was between 17-31%
- During the current episide, which actually began on October 30th, 2013, the total peak to trough decline has so far been 10%
- In each of the last four selloff episodes the acceleration, or “waterfall”, phase of the decline accounted for the majority (75-88%) of the cumulative losses experienced
- Assuming the acceleration phase of this selloff started on January 22, 2014, the current “waterfall” has only accounted for 42% of the cumulative loss
- The average number of calendar days over the last four selloffs is 112 vs the current reading of 89 in this instance
- The average number of calendar days in the “waterfall” phase of the selloff is 38 vs the current reading of 7 in this instance
- The “waterfall” phase of previous selloffs has accounted for between 20-55% of the total number of calendar days of the total decline
- Having just started, the current “waterfall” only accounts for 8% of the total duration of this selloff
- In each case the S&P 500 declined less than the MSCI EM Index
- In each case the S&P 500 relative decline diminished with each subsequent EM selloff (excluding the current, unfinished EM selloff)
Based on this simple analysis it becomes rather clear that there is a high probability the current rout in EM stocks has more to go before it’s finished. Based on the last four selloff instances in this market cycle, we’d expect another 3-8 weeks of turmoil and the cumulative loss increase markedly from the 10% peak to trough decline we’ve seen so far. If we are in fact in the “waterfall” phase of this decline, we should expect almost daily losses until it is over. Previous experience also suggests the S&P 500 will be more resilient than the broad EM stock index, but by how much is uncertain.