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Submerging Markets are Slumping

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July 12, 2013
Chad Karnes, Chief Market Strategist

It seems the next big “opportunity” everyone was talking about, the emerging and frontier markets, turned out to be just another unfortunate example on a long list of bad advice from Wall Street.  This kind of canned advice to try to sell the frontier markets to investors certainly fit the usual Wall Street script nicely though. 

These tactics usually come with some supposedly good fundamental backdrop, typically include a powerful potential growth story, and almost always sport historical market returns that are robust.  Unfortunately, making money in the markets requires a little more than pretty descriptive stories. 

Emerging markets refers to countries like Brazil, China, India, and others where their economies are in the midst of becoming fully industrialized. Frontier markets refers to even tinier countries in the same growth curve like Nigeria (NYSEARCA:NGE) and Vietnam (NYSEARCA:VNM).

Stocks in these countries were the darling suggestions of Wall Street in 2012 and 2013 with the smaller, harder to access ones touted as great spots for your money.  These markets had “growing economies, thriving local consumer markets, and access to smaller, more opportune businesses”, they clamored.  An even better reason to buy was because, “they provide great diversification for your portfolio”. 

It seems everyone wanted a piece of the emerging market action.  As a recent Barron’s article from March 18 explained while supporting the notion of buying into the theme, “that’s why institutional investors, including endowments and pension funds, are increasingly assembling teams of specialists to parse their allocation to emerging markets.”  

Unfortunately, it seems everyone was returns chasing, not looking at the charts, and was certainly not noticing what we were noticing.  Buying at the right price is what makes you money, and buying at any price, no matter what it is, is never a good strategy.

The Reality of the Periphery

Take a look at the chart below (updated through late June) which was included in our latest ETF Profit Strategy Newsletter and what do you see?  If you aren’t located in the Northern Hemisphere with a temperate climate, then your equity markets (NYSEARCA:EWZ) are down, with some getting crushed.




Only a handful of equity markets around the world (NYSEARCA:VT) are higher YTD, and the U.S. (NYSEARCA:IWM) and Japanese  (NYSEARCA:EWJ) markets stand alone as the only ones up meaningfully. 

This is something we were focused on back in March when our April ETF Profit Strategy Newsletter warned, “The early signs of a potential bear market in stocks is already manifesting itself in the price action of major emerging market funds like the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)”.

That same week in March, Barron’s suggested buying all of these frontier and emerging markets, but we warned against it in our MegaTheme section of the Newsletter.  “Emerging market stocks are lagging developed markets and could be a sign of a tiring stock market bull.  Lackluster performance is especially notable in China, Russia, and the Middle East”.  

We included the below chart that helped show the reality of the world’s situation along with supporting commentary that explained why emerging markets are not where you want to be.

 


Instead we suggested capitalizing on the obvious downtrend and deterioration of emerging markets through our weekly ETF pick.  On March 20 we wrote:

“Russian stocks inside the Market Vectors Russia ETF (NYSEARCA:RSX) have lost 6.8% YTD and have been lagging global equity markets (fyi shown above in the world chart, they are now down 17%).  Aggressive traders can buy the Direxion Daily Russia Bear 3x Shares  (NYSEARCA:RUSS) between $17.50-$18.00”. 

We closed that trade a few weeks later as we suggested taking half of the profits at $19.50 (12% gain) and moved remaining stops up to breakeven.

It was clear to us that something negative was occurring in the world’s periphery as the former market leaders of the last few years were quickly becoming this year’s laggards.

Wall Street stuck to its usual script, though, and lost those taking its advice significant amounts of money.

Have Things Changed?

Since March things have only gotten worse for the periphery markets.  The final chart below plots the performance of many of the popular emerging and frontier market ETFs since the beginning of the year along with the dashed line S&P 500 (NYSEARCA:SPY).  The vertical line shows what has happened since March, when Wall Street was laying on the bullish frontier theme very thick. 

Many of these ETFs, such as the iShares Emerging Markets Bond Fund (NYSEARCA:EMB), are now down around 10%, and the Guggenheim Frontier Markets ETF (NYSEARCA:FRN) is now in a bear market, down over 20% in only half a year. 

 

To add insult to injury many of these Emerging markets are back at price levels last seen in 2011, with some flirting with late 2009 price levels.  This means the average investor in these funds has not made any money the last few years.

The ETF Profit Strategy Newsletter monitors global events and formulates profit strategies based on fundamental, technical, and sentiment research.  Come see how our contrarian approach can help you stay on the right side of the market

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CommentsAdd Comment

Chad, ETFguide said on July 15, 2013
  Great find Baker...just goes to show a little fact checking can sure go a long way (or a glance at a chart). I am sure many would assume China had been a great place for investments over the last 20 years...at least that is how it has been sold.

Keep the powder dry indeed!
 
 
BakerGirl said on July 14, 2013
  Hello Board members,

Check out this Bloomberg report about the world's largest emerging market, China:

China Wealth Eluding Foreigners as Equities Earn 1% for 20 Years
http://www.bloomberg.com/news/2013-07-14/china-wealth-eluding-foreigners-as-equities-earn-1-for-20-years.html

Keep your powder dry!
 
 
grant8 said on July 12, 2013
  Dying exports and crashing commodities are just killing EMs. Domestic consumption was supposed to pick up the slack in EMs. So far not working out as planned.
 
 
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