Emerging Market Stocks Are ‘Overbought’: Technical Analysis

(Bloomberg) -- Emerging market stocks are “technically overbought” after 12 straight weeks of fund inflows drove the global benchmark index above its 200-day moving average, Morgan Stanley said. The MSCI Emerging Markets Index is about 24 percent higher than its 200-day moving average and three standard deviations overbought compared with its three-month average, analysts led by Jonathan Garner wrote in a report. The measure had traded at 56 percent below its 200-day moving average and was three standard deviations oversold last October, the analysts added. The MSCI Emerging Markets Index has gained 34 percent this year, outpacing a 3.9 percent gain in the MSCI World Index. Developing countries make up all 10 of the best performing markets among the 93 global indexes tracked by Bloomberg. “Prices have risen very rapidly and valuations are not as attractive versus just a few months ago,” the Morgan Stanley analysts said in the report dated yesterday.

Following its gains this year, the MSCI index for developing countries is now valued at 14.7 times reported earnings, compared with a low of 6.2 times reached in October, according to data tracked by Bloomberg. The index’s price-to- book multiple has also climbed to about 1.8 from the low of 1.1 last year.Emerging-market equity funds drew $2.1 billion in the week to May 27, Cambridge, Massachusetts-based research firm EPFR Global said in a statement yesterday. Net inflows over the past 12 weeks have amounted to about $23 billion, equivalent to the levels seen in 2005 and 2006, Morgan Stanley. “The two most recent episodes when flow momentum reached these levels were June 2008 and October 2007, providing good sell signals,” the strategists said. Garner, Morgan Stanley’s chief Asian and emerging-market strategist, last month reduced his equity allocation to 56 percent of assets from 60 percent, after a rally left valuations less attractive.