India set to dominate emerging markets? These 5 charts hold a clue.

China is a shining example when discussing the blueprint for economic reform in developing countries. The nation’s journey from turmoil to triumph offers invaluable lessons on how to build a resilient and powerful economy.

Between 1700 and 1900, China was a dominant force globally, ruling not just in territorial expansion but also in economic influence. However, by the late 19th and early 20th centuries, the country lost its footing, becoming a shadow of its former self. The formation of the People’s Republic of China in 1949 marked a new beginning, a fresh start that paved the way for economic reforms that would later fuel one of the fastest-growing economies in the world.

The seeds of these reforms began to bear fruit by 1979, propelling China onto the global stage as a financial powerhouse among developing nations. China’s rise was so significant that when the MSCI Emerging Markets ETF index (EEM) was conceptualised in 2001, China was given the highest weight among the 24 countries included—a position it still holds.

However, the winds of change are blowing. India, Taiwan, Brazil, and South Korea are positioning themselves as the new pillars that will elevate the EEM to greater heights. According to the MSCI Emerging Markets report published on 31 July, China commands a 24.54% weight, followed by India at 20.01%, Taiwan at 18.45%, Brazil at 4.32%, and others collectively at 20.58%.

Can these markets, particularly India, lift the EEM higher? The answer appears promising.

Sensex: The Atmanirbhar beacon of emerging markets

India’s Sensex, often referred to as the Atmanirbhar (self-reliant) index, has emerged as one of the most resilient and outperforming indices, not just against other emerging markets but also when compared to developed countries.

On the weekly chart, the 30-stock Sensex broke out of a rising channel pattern, retested the breakout level, and resumed its bullish momentum. This pattern indicates a strong, long-term bullish trend, with bulls firmly in control. 

India’s weight in the MSCI Emerging Markets index has risen from 8% in 2020 to 20% this year, reflecting the growing global influence of the country’s economy. Given the Indian government’s $5-trillion GDP vision and the long-term trend of the Sensex, it wouldn’t be surprising if India’s weight on the EEM eventually surpasses China’s.

TAIEX: A bullish outlook

The Taiwan Capitalization Weighted Stock Index (TAIEX) is a key indicator of Taiwan's stock market performance, reflecting the economy’s overall health. TAIEX is another critical component of the EEM, with an 18.45% weight. 

On the weekly chart, TAIEX has shown remarkable resilience, particularly in 2020 and 2022, where it rejected levels below the 200WEMA (200 weeks exponential moving average) and rallied strongly. This history seems to be repeating, with the index now testing the 50WEMA and heading northwards, suggesting that the bulls are once again taking charge. 

From a technical analysis perspective, the Dow Theory’s higher high and higher low structure on TAIEX charts indicates a robust bullish trend. With Taiwan’s significant weight in the EEM, the combined influence of TAIEX and Sensex, totalling 38%, surpasses that of China, marking a potential shift in the balance of power within the EEM. 

Brazil’s BOVESPA: A breakout in the making 

Brazil’s Bolsa de Valores de São Paulo (BOVESPA) index has been an underperformer within the EEM, hovering around its highs from 2021 to 2023.TradePoint, Definedge

The weekly chart suggests that this period of consolidation might soon end. The index is on the verge of breaking out from a Cup and Handle pattern. This technical analysis formation often signals the continuation of a bullish trend after a period of consolidation. The Cup and Handle pattern, characterised by a rounded bottom followed by a smaller consolidation, is an indicator that the Brazilian market is poised for an upward move.  

Although Brazil’s weight in the EEM is only 4.32%, when combined with India and Taiwan, it strengthens the case for a bullish trend in emerging markets. 

KOSPI: A bullish resilience 

South Korea’s Korean Composite Stock Price Index (KOSPI) is another key player in the emerging markets arena.

Despite short-lived bearish momentum on the monthly chart, the bulls have maintained control of the long-term trend. The golden cross—a technical indicator where the 50 months moving average crosses above the 200 months moving average—is a strong sign of a long-term bullish trend on the monthly chart. 

Historically, the KOSPI has found support within the 50EMA and 200EMA bands, acting as a long-term demand zone, as seen in 2004, 2008, and 2020. According to the Dow Theory, the index is trending within this demand zone, forming a higher high and higher low structure. 

Additionally, the golden ratio of the Fibonacci retracement at 61.80% is providing support, with the index heading northwards. The recent reversal at the 50MEMA reinforces the bullish outlook, suggesting that the KOSPI is ready to join forces with India, Taiwan, and Brazil in driving the EEM higher. 

MSCI Emerging Markets Index: The dawn of a new bullish era 

The MSCI Emerging Markets ETF Index is currently amid a significant bullish trend. The 65-week consolidation between January 2023 and April 2024 culminated in a breakout in late April, triggering an 8% rally.

A breakout rally in the EEM was followed by a retest, forming a Bullish Belt Hold candlestick pattern in the first week of August and suggesting a possible reversal of a downtrend. The bullish follow-up last week confirms that the retest phase is over, and the index is now in the resumption phase of its bullish trend. 

A golden cross in July after two years of a death cross, reflecting price weakness, coupled with the bullish range breakout adds further weight to the argument that the EEM is entering a robust bullish phase. 

On the indicator front, the Relative Strength Index (RSI) is also trending bullish, having reversed northwards after testing the median line of 50, signalling strength in the current uptrend. 

A new era of emerging markets

China has long dominated the narrative of emerging markets, but the tide is turning. As India, Taiwan, Brazil, and South Korea take the reins, the MSCI Emerging Markets Index is poised for a new era of growth.  

The combined weight of these four markets is not just a statistical figure; it represents the shifting dynamics of global economic power. 

The technical indicators are aligning, the charts are breaking out, and the bullish momentum is building. The EEM is on the cusp of a new chapter—one where the rise of other emerging giants balances China’s dominance. 

The journey ahead looks promising, with the potential for higher returns and stronger market performances. Investors and economies stand to benefit as these emerging markets continue to rise, taking the EEM to new heights. 

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, consult your adviser. This article is strictly for educational purposes only.  

Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C Mehta Financial Services, and Edelweiss Securities. Presently he is an analyst at Definedge. 

Disclosure: The writer or his dependents may or may not hold the stocks/commodities/cryptos/any other asset discussed in this article.