Back in 2010 we thought about what might make good ‘trades of the decade’. Bill Bonner thought the most obvious way to preserve capital over the ten years until 2020 would be to sell Treasuries and buy Japanese equities. That was hard to disagree with. But thinking just about equity markets, I thought it might also be a good idea to sell one more thing that everyone loved and buy one that most people rather disliked. So, I suggested selling emerging markets in the East and buying developed markets in the West (alongside Japan).
This was such a nutty contrarian suggestion at the time that even Bill, the greatest in-house contrarian a contrarian magazine could hope for, said he wasn’t so sure it was a good idea. That may well turn out to be the case (2020 still being some time away and the world being a very uncertain place). But for now it’s going pretty well.
Some of the peripheral European markets haven’t had their best run ever, but the FTSE 100 is up about 15% since. The Dax has done 30%, the Nikkei 20%, and the S&P 500 more like 50%. Things haven’t gone so well in emerging markets. China is down 30%, Brazil is down 46%, and India has given up 25%. Recent days haven’t helped them out any either – Indonesia’s market lost 10% in two days alone earlier this week.
And this isn’t just about equity markets – emerging-market currencies have been hard hit too: several of the biggest ones have weakened against the US dollar by over 15% in the last few months alone. We have noted several times that the great financial crisis was unlikely to leave Asia unscathed. It clearly isn’t. It is about markets preparing for yields to rise in the US as monetary policy begins the long road back to normality, about everyone finally noticing what a terrible state China is in, and about Asia’s own credit bubble.
However, the key thing to note is the speed at which money is pouring out of the emerging markets: Bloomberg reports that in the first half of this year, $7.6bn flowed out of emerging-market funds in the US. That might make most people think twice about heading in the other direction. But regular readers will know that we most like to invest where other people don’t and won’t. So we’ve used this week’s issue to take a closer look at valuations in some of the emerging markets we like.
John Stepek has written about Brazil here, concluding that, while it has a pretty long list of problems to deal with, it is cheap enough to buy. David C Stevenson isn’t so keen on Latin America, but he also looks at the funds he would buy to take advantage of summer-sale-style prices in the East. You won’t want to shovel your whole pension in yet – a good crisis will make the shares we like even cheaper. But this is a better time to invest in emerging markets than we have seen for a good many years.