War, what is it good for?
Absolutely nothing as far as the song goes.
In a prior market note we commented on one particular scenario which could paradoxically be good for investing in Emerging Market equities and that was an outbreak of War.
Over the weekend we got more clarity on the Sunni backed push into Shiite Iraq and heard about a new more barbaric group called ISIS – as if that were possible.
Then in the small hours of Monday morning, US Eastern time, Russian state-owned gas firm Gazprom said it had cut off supplies to Ukraine after negotiators failed to resolve a payment dispute before a key deadline expired. Possibly another escalation in Russia’s campaign to reclaim prior Soviet satellites.
Who knows where this all leads? News flow continues to be volatile and scattered – they don’t call it the fog of war for nothing!
The two conflicts center around a common theme and that is ENERGY. Last week West Texas Crude moved up 3.9% to $106 suggesting the more important longer-term resistance at $110-$112 will soon be tested (dark green line in chart below).
A move above that resistance zone will bring the old 2008 highs of $147 into focus and we are guessing the headlines will be reading significantly more fearful, if and when we reach that point … but one step at a time.
Notice the correlation between the Emerging Markets ETF and West Texas Crude at the bottom half of the chart (blue lines). If the blue line is above zero it implies the ETF is moving in the same direction as Crude. Notice how the ETF has spent most of its time above zero and a significant amount of time above 0.7 (close correlation).
Lastly, notice how the blue line moved from negative to positive since the beginning of 2014 (green circle), hence our thesis that a higher Oil price should translate into higher emerging market equity prices as it benefits emerging market energy producers.
We are watching the situation closely to see whether this scenario is playing out as described … stay tuned.
Greg Silberman CFA®, CAIA, CA(SA)
Chief Investment Officer
Advisory Services offered through Atlanta Capital Group.
Securities offered through Triad Advisors, Member FINRA / SIPC
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