Analysis: Euro and emerging economies and equities switch tracks

Wed Aug 7, 2013 1:55am EDT
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By Mike Dolan

LONDON (Reuters) - Western European economies are spluttering to life again at last just as emerging markets cool down - confirming one of the investment themes of 2013 and questioning how much financial markets have already discounted these inflection points.

While "sell high and buy low" may be an investment truism subject to myriad valuation and policy caveats, selling equity in cresting economies while buying it in troughing ones is a pretty well-worn global strategy.

And rarely has a contrast in economic momentum been as obvious as in this week's global business surveys, which painted a stark picture of diverging trends between the developed world and emerging markets.

Private sector businesses in the long-dormant euro zone, for example, grew in July for the first time in 18 months while firms across the emerging world indicated a contraction for the first time in four years.

Yet even though that growth baton only passed last month, markets have been front-loading the likely switch all year.

So much so, that the blue-chip Euro STOXX index .STOXX50E is up 9 percent so far this year while a dollar-based MSCI index of equities from leading emerging giants of Brazil, Russia, India and China .MIBC00000PUS have lost almost 13 percent.

The big questions on many investors' minds is whether this week's economic crossover is already long in the price and if there's any more mileage in the switch.

For three main reasons - likely persistence of the relative economic trends and local monetary policies, relative equity valuations and cumulative fund flows - strategists reckon it's too early to go into reverse.   Continued...

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange July 9, 2013. REUTERS/Remote/Stringer