Emerging markets have gone from zero to hero!
The stock indices no one wanted to touch have rallied. The currencies everyone declared to be toxic have started to surge. The political and economic disasters Wall Street pundits forecasted either haven’t panned out, or have gradually sorted themselves out.
Martin discussed some of these “Blast-off markets” earlier this week, and offered his thoughts on what’s driving the gains. Now I want to address the most important follow up question: Should you join in the rally?
First, it’s important to understand why emerging markets got hit so hard. It boils down to the dollar surge, the energy plunge, political scandals, and geopolitical turmoil — in no particular order.
Russia’s provocative moves in Crimea and southeastern Ukraine led to economy-hurting sanctions against the country, and capital flight amid the nation’s wealthy oligarch class.
Brazil’s “Petrobras (PBR) Panic” — sparked by worries over that company’s heavy debt load and its bribery and corruption scandal — drove the country’s currency and economy into the tank.
|The collapse in energy prices sent many emerging markets, such as Venezuela, into a tailspin.|
Countries as widespread as Venezuela, Indonesia, Malaysia, and Mexico got hammered by the collapse in energy prices, sending their currencies, stock markets, and bond prices into a tailspin.
The end result: The iShares MSCI Emerging Markets ETF (EEM) plunged 19 percent to $37-and-change between September and late December. That put it all the way back at a level it first eclipsed in 2009 — almost six long years ago!
Specific ETFs, like the Market Vectors Russia ETF (RSX) and the iShares MSCI Brazil Capped ETF (EWZ), fared even worse. They plunged back to levels we last saw during the depths of the 2008 global market meltdown.
I had been wary of the impact of monetary policy moves and geopolitical forces on emerging market investments in 2013 and 2014. So fortunately, my Safe Money Report subscribers dodged that pain.
I’ve also been noticing that several peripheral and less-well-followed currencies than the euro have been bottoming out in relation to the dollar in recent weeks. Every currency from the Russian ruble to the Brazilian real to the Norwegian krone to the Indonesian rupiah has rallied to multi-week and multi-month highs.
Then last week, the Canadian dollar broke out to the upside. On Wednesday, the British pound jumped to its highest in almost two months. And in the last few days, crude oil prices broke out through significant technical resistance to a fresh 2015 high of around $57.50 per barrel!
In short, many of the same forces that crushed emerging markets last year, are turning in their favor this year. I don’t know 100 percent that this will continue. No one does. But I do know that the fundamentals are starting to turn at the same time sentiment on emerging markets remains very negative, and market positioning in emerging market investments is weak.
A recent poll of investors and economists by Reuters failed to find a single one who expected that economy to recover, or Brazilian stocks to rally much. A separate survey by Bank of America Merrill Lynch found global fund managers — who control more than $600 billion in assets — remained 18 percent UNDERweighted emerging markets as of April. They stayed that way even as emerging markets firmed up in terms of performance.
Bottom line: I believe we’re still far from the point where everyone is on the bandwagon. And that means this move could have a long way to run. So as long as you’re selective in terms of quality … and you have a team like ours by your side to help guide you … I think foreign markets could provide you with some significant profit opportunities!
Until next time,