Why the 10-year Treasury Note is Important to Emerging Markets.
I look at almost all the markets from a long-term perspective. I truly believe that eventually all these markets work within a mathematical equation. Remember, we have used this valuation method before. This is what Warren Buffett uses as his single best measure of a market. Gurufocus calculates these values daily. Here is their calculation on the US by Gurufocus.
As of 8/20/2019, China’s valuation is at 41, almost at an all-time low. Why the huge difference in valuations? What would make things move back to normal?
Let's think about this for a minute. Currency manipulation, central banks, trade wars, and political theater could all be part of this. Let's look at the 10-year US Treasury Note to get some help. The 10-year Treasury note has been falling off a cliff since May but has been going down steadily since last November. This can mainly be caused by uncertainty. It is probably a combination of everything listed above.
Ten-year treasury notes 2018-2019
The ten-year note has corresponded very closely to emerging markets. When the 10-year Treasury note accelerated to the downside in May of this year, emerging markets went down.
Let's look at what happened in 2016. That was a tumultuous year. Remember, Britain voted on Brexit and Europe was facing a lot of questions about a potential break up. Also, the Mexican peso was tanking because of some of the policies of the US government. All in all, there was a lot of uncertainty and the 10-year Treasury note headed down precipitously falling to about 1.5% where it roughly is today.
Ten-year treasury notes 2015-2018
The emerging markets also followed the 10-year Treasury note down because of all the uncertainty. But once the 10-year Treasury note hit an all-time low point of 1.55%, the stimulus cavalry around the world really kicked in and the 10-year Treasury note started going up as well as did the emerging markets.
MSCI Emerging Market Index 2015-2018
Conclusion:
We can probably assume with the 10-year Treasury note back to its all-time low that the stimulus around the world will really start kicking in again. Gurufocus tells us that valuations in countries like China are close to their all-time lows. There is still a lot of uncertainty but central banks lowering interest rates and printing money can provide a lot of answers to those uncertainties. There has been a lot of stories about the demise of the world economy. Also, if this is the low of the 10-year Treasury note or close to it, then it could like 2016 and be an excellent time to be in emerging markets and not out of them.
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