Negative sentiment is rising on emerging markets
Here are some thoughts on why, and what to do about it.
As I’ve said recently in my videos and in my posts on China, the tide of sentiment has turned against emerging markets and emerging market equities.
You can see it in the performance numbers. For 2013 to date the iShares MSCI Emerging Markets ETF (EEM) was down 9.30% while the SPDR S&P 500 ETF was up 21.01%. Quite a trouncing for an emerging market index that was up 69.9% in 2009. From 2002 to its peak in 2007, the emerging markets index was up 320%.You can see it in the cash flows. In June $9 billion flowed out of ETFs that invest in international equities. The most unpopular ETF of all? The iShares MSCI Emerging Markets ETF, which saw outflows of around $4.4 billion.
And you can see it in the headlines. Here’s one from the Financial Times on July 27: "Book closes on the EM growth story." Or how about this one from Bloomberg, on July 22: "BRIC Bust Seen in Emerging Market Discontent With Growth."
So what do you do? Do you go commando and contrarian and load up on an unloved asset because it is unloved? Do you follow the crowd and stay as far away as you can -- until you see evidence that sentiment has turned? Or do you wait as patiently as you can -- with cash on the sidelines -- until the current dislike turns to absolute hatred and then buy, hoping to catch a bottom in a historically volatile sector?
This isn’t exactly an academic question for me. The mutual fund I manage, the Jubak Global Equity Fund (JUBAX), had a little more than 20% of its stock holdings in emerging markets as of the end of May. The past performance of emerging markets matters to me -- and figuring out the future direction of emerging markets is perhaps even more important.
I’ve been thinking a lot about the issue lately. And while I don’t have any definitive answers I do have something like a framework for looking for an answer.
I think the "problem" of emerging market performance -- and the related issue of the negative sentiment on emerging markets -- needs to be broken into three parts.
First, there is the objective data showing a slowdown in economic growth in such major emerging markets as China, Russia, India, and Brazil. (That pretty much covers the BRIC countries, right?) China, which used to do a reliable 9% or 10%, looks headed down to the official target of 7.5% or less. (You don’t have to search hard for an economist with a forecast of 7% or lower these days.) Brazil, to take another example, grew at a 7.5% rate in 2010 but at only 1.3% in 2012. The world’s developing economies will grow by 5% in 2013, the International Monetary Fund projected recently. That’s well below the 6.6% average annual growth of the last decade.
Second, I think there’s an objective/subjective problem that makes this slowing more disconcerting than a drop from 6.6% growth to 5% might be in other contexts. We’ve gotten used to thinking of the high GDP growth in developing economies such as China as the reason to invest there. China is growing at 9%, so I’ve got to put money in Chinese stocks. (This shorthand way of thinking comes despite persistent evidence that there isn’t a solid connection between GDP growth rates and stock market performance. Just look at the performance of the S&P 500 recently during a period of economic growth in the United States that’s below trend for a recovery.)
And we’ve gotten used to seeing a relatively small number of big cap stocks as proxies for the out-performance of developing markets. Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO) are some New York listed big caps that represented an easy way to buy the emerging markets story. You can find other representatives of the most popular stocks for investing in the emerging markets story by looking at the top 10 holdings of the Vanguard FTSE Emerging Markets ETF (VWO): China Construction Bank, China Mobile, Industrial and Commercial Bank, Taiwan Semiconductor, American Movil, OAO Gazprom, CNOOC, Bank of China, and Tencent Holdings. When these stocks have faltered, it has felt as if the emerging markets sector is faltering.
Third, and this I think is mostly a subjective problem, what’s apparent in looking at the stocks that most investors use to invest in emerging markets -- and we’re talking about some really large stocks here, with a market cap of $181 billion for China Construction Bank (CICHY) and $71 billion for Vale -- is that they, for the most part, represent a specific model of economic growth; one that is based on commodities, and exports and investment-led growth.
I think what we’re seeing now in major developing economies isn’t just a slowdown but also a change from this export-led model for growth to one that is more domestically focused and more consumer focused. If that’s true that’s both an objective challenge to these economies -- can they pull off this transition -- and a subjective challenge to investors, who are used to looking for their investment choices for these markets to a group of stocks that is no longer leading stock market and economic performance in these countries. The subjective challenge is to avoid generalizing -- the under-performance of Vale isn’t an indication of under-performance for all of Brazil’s economy -- and to become familiar with a new set of stock names that includes the leaders of a new pattern of growth that emphasizes the domestic consumer.
So, to go back to my original question, what do you do now?
I do think you need to recognize that the old export-driven, commodity names still haven’t found a bottom. As long as China or Brazil, for example, are groping toward a new growth foundation, commodity-based, export-oriented stocks can’t be said to have bottomed.
I think you need to recognize that during this bottoming process we aren’t looking at a rising tide that lifts all boats. On the evidence of the last 12 months, it is possible to find domestic consumer stocks in emerging markets that do well but these stories are the exception rather than the rule. Yes, Kroton Educacional in Brazil is up 109.72% in the last 12 months or, Tencent Holdings (TCEHY) in China is up 57.20% in the last 12 months, or Industrias Bachoco (IBA) in Mexico is up 73.04% -- but these stocks aren’t typical of the performance of domestic consumer stocks in emerging markets. (More typical is the 12.85% drop in shares of Natura Cosmeticos in Brazil or the 16.66% loss for Ping An Insurance (PIAIF) in China.) Making money, even in domestic consumer stocks in developing economies when sentiment is so against these markets, is hard.
If my thesis about the shift in the economic models for these developing economies is correct, investors in these markets will have to learn a new set of stocks -- and they’ll have to figure out how to trade them in local markets, since relatively few developing economy domestic consumer stocks are listed in New York.
And, finally, investors will have to keep in mind that while domestic consumer stocks may outperform the old export driven stocks now, and while they may outperform them in the long run when sentiment about emerging markets does turn, the biggest quick winners are likely to be the old, familiar, beaten-down exported driven stocks. You may not want to own them for the long haul but you surely will reap big returns if you can call the turn in sentiment.
At least, that's how I’m thinking about investing in emerging markets for the next year or so.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Industrias Bachoco as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio.
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Say the tail spinners from the story book are quite entertaining!
This latest puppet theatre of oxy moron numbers laid out is yet another swell of 50/50 half truth garbage. But in order to keep the sheeple (Opps! players we meant) in the casino house such must be.
Why think of it in terms from that not so distant CBO meeting when stated to the supply houses and manufacturers for when spouted was 'HOLD THE MARKETS AT ALL COSTS!' Last thing needed is to lose that investor confidence!
Yes that House of cards being pasted together by DEBT,DEBT,DEBT! From all of that clicity-click action of false creation never to be repaid but merely to hold STALLATION in play until CHANGE. And that is one heck of a look that CHANGE for those that want to keep up with TRUTH and REALITY in which will be not if to be inflicted from the long overdue nonsense in which has prevailed behind the magicians curtain.
Here is a great piece to be reflected upon,
July 31,2013 - Today's GDP report was a complete Orwellian farce. The annualized number for Q2 was reported to be 1.7%. Of course, lost in the shuffle was the second massive downward revision for Q1 GDP, which was revised down again from 1.8% to 1.1% What that means is that on an inflation-adjusted basis the first quarter GDP was negative - i.e. the economy is in a recession.
However today the Government rolled out its massive "revision" in the overall GDP level going all the way back to 1929. In sparing you the ugly details, essentially the net affect of this was to raise the overall GDP level by $551 billion. How, you might ask? The Government went all the way back to 1929 and reclassified all the money spent on "intellectual property products" and reclassified them as "investments" rather than expenses as incurred. So, if you figure out a new way to remove the wrapper from a Hershey bar, the Government decided that 20% of the cost of that Hershey bar was an "investment" in making your life easier, so 20 cents of the dollar spent becomes an "investment" and added to the GDP. While that may seem like an absurd analogy, it really isn't. Here's the BEA's nice marketing flyer on this Orwellian change:
Of today's 1.7% annualized GDP estimate, .15 is attributed to the new "intellectual property products" and .41 is attributed to inventory build. Why are businesses building inventory when consumer demand for everything except basic necessities is declining? If you strip out the unneeded inventory build and erase the intellectual property garbage, the GDP is 1.2%.
Recall that Q1 GDP was originally reported at 2.4%, revised the first time around to 1.8% and now has been taken down 1.1%. Expect the same thing to happen to today's farce of a number. As for the half-trillion dollars added to the overall level of GDP, there's only one reason this was conjured up: it makes the Debt to GDP ratio look not quite as bad. It goes from 105% of GDP to 101%. Brace yourself for a big increase to the debt limit ceiling...
Orwell is laughing his **** off and Atlas just shrugs.
Msn Refugee Board 2 / The Decoy 409 POST
Well they don't want you to know is apparent just how the casino has rolled such a number as we tried to ad the formula however it was rejected as this board is to busy at this time to post?
What a farce! Just like the old Msn days when Duff was here explain the Ponzi manipulation as to the gld and slv.
Speaking of.... why what about that dealer inventory as it is now well.... gone for the most part.
SEE The POST for the big banks hammering up the numbers on the board from A-Z in insider buy ups.
Actually, I thought or read more then once there have been immense flows of cash into this Country from some of these emerging markets....So I'm much in agreement wth our Jimbo.
Such as into our downtrodden real estate and up-trending equity Markets.
But with Global finances and investments being what they are today....
There are layers upon layers of paper shuffling...To really determine who is investing where or what their interest are in...Try following the money..?
Places like Smithfield garner interest, because of repercussions.
Other large Properties and such things as Toll roads...Not so much.
We do not need Foreign ownership of our food supply, communications or power grids..
Let alone any of our energy deposits, we have lost control in some of that already.
"In Europe we've seen basically a very flat economy it went down," said Seaman. "Unemployment is over double digits in
Europe. In China they have good growth over seven percent. On the other hand, China was doing 12,13,15 percent."
Breaking down the spin,
First you have some real nonsense with,
excerpt - after separate data showed Italy’s recession eased in the second quarter.
excerpt - “Stronger-than-expected German factory orders have been encouraging and support the view that, economically, the European outlook is finally beginning to turn,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, wrote in a note to clients.
Euro at Almost 7-Week High After German Orders Climb
Now the article flat out states recovery is on and things have turned. However as we stated time and time again STALLATION to Change and Sham WoW folks is all that is going on when such nonsense as above is propaganda.
Aug. 5,2013 - Lafayette Caterpillar announces layoffs
Layoffs effective this month
LAFAYETTE, Ind. - (WLFI) - Lafayette's Caterpillar plant will layoff 125 workers at the end of this month.
The announcement came after quarterly financial reports show a difference of 30 million dollars profit from the first quarter of 2013 to the second quarter.
Greater Lafayette Commerce President and CEO Joe Seaman said Caterpillar is a major international exporter, but those international orders are not as high as they once were.
"In Europe we've seen basically a very flat economy it went down," said Seaman. "Unemployment is over double digits in Europe. In China they have good growth over seven percent. On the other hand, China was doing 12,13,15 percent."
In an emailed statement, Caterpillar said measures like vacation shutdowns and reduction in flexible workforce have already been implemented.
Seaman said the slow down in demand started at the beginning of the year.
"I think they started to see some slow down of order coming in in the first quarter. And I think that perpetuated into the second quarter."
In June the Tippecanoe County unemployment rate spiked to 8.6 percent. Seaman said the layoffs should not affect the percentage much, but it can affect the community's morale.
Caterpillar Caterpillar declined a News 18 interview request. Layoffs are set to begin August 26.
source/WLFI ch 18 NEWS
Of course once you SEE the centrals and the insider HOLD THE MARKETS AT ALL COSTS buying up that paper and things such as,
Aug. 2,2013 - Jim Willie: Bullion Banks Have Pilfered 60,000 Tons of Gold From Allocated Accounts!
Round and round the musical chairs have gone on the sinking Titanic folks. So where and when do you think it stops?
And that is PATHETIC!!!
The funny board of untruth took that post below no problem! tried to paste in the numbers and sources as to and the board simply states it's too busy? At this time?
Ok if you say so. Now where is the sick face to paste.
very nice analysis mr. J. i would have liked to hear more about your take on the large cash drains in these emerging market countries as the hot yield-seeking cash flows back to the US.
China is a great place to invest. A little bird told me. There is a huge market there for Cabbage Patch Dolls.
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After enjoying a smooth rise in stock prices since May, investors are about to be hit with another bout of volatility.
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