By MoneyMorning.com.au
After the impending disaster that was otherwise known as an ‘emerging markets crisis’, what do you know?
The Australian market has recovered about half its losses since the start of the year.
Another crisis appears and disappears quicker than it came. In its wake it leaves…that’s right, a raft of investing opportunities.
Sounds great. Trouble is, where do you start…?
As a contrarian investor we go where other investors fear to go.
During the depths of the global financial meltdown in 2008 and 2009 we told investors to pile in to some of the market’s most hated stocks – small-cap stocks.
In late 2012 and 2013, when most investors were too afraid to look at their own shadow let alone buy shares, we advised increasing your exposure to dividend-paying stocks.
Then for most of the past year we’ve suggested that investors take more interest in resource stocks. That culminated in us hiring a dedicated resource analyst to find, research and recommend the best resource stocks on the Aussie market.
And although we can’t claim to have backed tech stocks since the market turned around in 2008, the timing of the launch early last year of Revolutionary Tech Investor coincided with the most recent gains for the NASDAQ index.
We won’t claim to have picked the bottom of these markets. That’s not our aim. We’re simply looking for developing trends and then we try to back them early before others rush in.
That leads us to the next trend investors should follow closely – emerging markets.
Phone Box Convention
To be honest, we’re not completely alone in the view that emerging markets are worth a punt. Although it’s also fair to say that if you held a convention in a phone box (remember those?) for emerging markets enthusiasts, you’d struggle to sell the place out.
But we’d have one companion. David Bloom, head of global currency strategy at HSBC in London told Bloomberg News:
‘When others are crying, you should be buying. This is not the time to be bearish. The time to be bearish was a year ago. If you missed that, you’ve missed the boat.‘
Bloom is referring specifically to emerging markets currencies. On the question of currencies we’ll leave that to Bloom. We figured long ago (just after passing our foreign exchange exam) that the currency market was way too difficult for your editor to understand.
So we stick to what we know – stocks.
And when it comes to emerging markets stocks, we take the same view as HSBC’s David Bloom. This is the time to buy the market, not sell it.
But what’s this? Things are getting cosier in the phone box. Bloomberg News reports on another emerging markets bull. This time it’s Gary Dugan, chief investment officer in Asia for the Queen’s bankers Coutts. He says:
‘If you look at the balance of trade that our clients are doing, they’re buying. There’s been an appetite for Asia and for Russia after the sell-off. There’s no crisis, it’s just talk.‘
But the guys at HSBC and Coutts really are in the minority. Most investors are doing as you’d expect; they’re trading the last ‘crisis’ rather than buying the next opportunity.
When We Say Emerging Markets, We Really Mean China
We like Dugan’s call, and his guts. But we’re not sure about buying Russia.
We may be a contrarian and a risk taker, but we’re not lunatics.
Coutts can take the Russia trade, we’ll take the rest.
It’s understandable that investors fret and fuss about the markets. It’s understandable that they panic and sell at the wrong time.
But what they’ve clearly forgotten is that this is how markets tend to behave. Prices rise and prices fall all the time. The important thing is to figure out if anything has fundamentally changed.
As far as we can tell, the simple answer to that question is no.
But let’s be more specific. When we’re talking about emerging markets, what we’re really talking about is the biggest emerging market of all, China.
Regardless of what anyone thinks about China’s growth rate, is it reasonable to think China’s economy will stop dead in its tracks? Even if China’s growth rate drops from the current stratospheric 7.7% to just 6%, these people do realise that the Chinese economy will double in size in less than 12 years don’t they?
So sure, there could be ongoing problems with some of the other emerging markets – Brazil, India, Russia, Indonesia, and so on – but as long as the biggest emerging market of them all stays on track to double in size within the next 9-12 years, we’ll stay firmly on the side of the small group of analysts rating China and the emerging markets as a buy.
It’s a risky trade right now. But if experience has taught us one thing, it’s that when the markets appear as risky as this, more often than not we’re right to follow our instincts (and the fundamentals) to buy the market.
Cheers,
Kris
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