Do movements in the price of oil foreshadow anything about emerging market equity relative performance?
The EM is the source of incremental global demand. Developed world demand is normally fairly flat.
The demand (and somewhat for supply) for oil is relatively inelastic. A large increase in price usually has only a small decrease in demand.
However that means the reverse also works: a small decrease in demand can have a large impact on price. If the emerging market demand drops, the impact on oil price can be large. The correlation is sizeable, but not perfect, and the divergence is what creates the occasional profit opportunity.
Here, you’d probably try to make the case that emerging markets are mispriced relative to the signal coming from oil.
But too many other things matter – starting valuations, the demand and supply dynamics driving oil, the pandemic and the co-movement of other macro factors.
In this instance, we know it is the supply side story associated with Russia (as per our earlier notes this morning).
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