Stock market divergence between US and EM is the worst since recession

Nervous
stock traders at the exchange in Rio de
Janeiro.
Gregg
Newton/Reuters

• US equities are outperforming non-US risk assets to a
  degree that hasn’t been seen since the financial crisis,
  according to Bank of America Merrill Lynch. 
• The key question investors need to answer is whether
  this is a buying opportunity, implying that global growth would
  continue and help emerging markets rebound.
• The cross-asset investing team recommended some trades
  that would benefit from a recovery in risk assets and yet hedge
  against slower growth. 

US markets are headed in the opposite direction to the rest of
the world. 

Last week, US stocks extended their recovery from the correction
in February and powered to new highs. Strong second-quarter
earnings were powerful enough to make this the
longest-running bull market — a feat which was confirmed
on Friday, August 23, when the S&P 500 closed above its
January high of 2,872.87.   

However, emerging-market stocks and other risky assets are still
stuck in a rut.

The S&P 500 has gained 8.6% this year, but the MSCI Emerging
Markets index has slumped by almost the same magnitude (-8.7%).

The pain in emerging markets has not been limited to equities.

Turkey’s lira, which lost more than one-third of its value in
August, is perhaps the poster child of a sell-off in EM
currencies that’s was partly triggered by higher US interest
rates. And right on cue, the emerging-markets carry trade, in
which investors borrowed in US dollars to invest in foreign
places with higher interest rates, has also fallen sharply. …

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