I found this article on Bloomberg about emerging markets. The general tone is to update the reader with what has happened in the last couple of months and has a generally positive bias quoting mostly Joe Quinlan from Bank Of America.
Mr. Quinlan is generally bullish on emerging markets; he is quoted as saying "most of the damage is done."
I don't know if he is correct and I am not sure that his being correct or not is very important. I have trouble believing the long-term theme is damaged; think generally here about the asset class not narrow country themes just now.
The end of ZIRP, really the threat of ZIRP ending, contributed to the selloff that started in May. For now, emerging markets certainly seem to be in the middle of a breather. I do not know if there will be a lot of selling later this summer or not but I do feel strongly that the next 10%, regardless of direction, will have very little to do with fundamentals. Because of the panicky nature of the spring selloff I think an argument to buy based on the fundies today, even if the argument is correct, should not be a catalyst to take action right now...unless the next 10% don't matter to you which is perfectly valid.
Too many folks, though, have trouble when a long term idea starts out ugly so waiting might make sense.
As an example of this I would look at Turkey. I have no position, no immediate plans to add exposure and have no idea when I would add exposure. Turkey has a couple of very big macro things going for it that I do believe in. The oil pipeline will be a printing press of money for the country and its seemingly endless process of trying to join the EMU (be a country that uses the euro for its currency) will also pay off one day. Combine those two with its large, 70 million, and young population and I think Turkey is very compelling. A little closer to the front burner are deficit issues, the recent reactionary and emergency rate hikes to combat inflation and the falling lira make this a rough time to be a buyer.
I have no doubt that the Turkish market will be much higher in ten years but I can't rule out that it will cut in half in the next 12 months (probably a little extreme but you get the idea).
I am about equal weight emerging markets after selling in April and May with no plans for further reductions. I also have no hesitation buying for a new client to create the portfolio but I can live with an ugly start to a long-term theme. If you cannot, you might want to wait.
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4 comments:
Roger,two quetions.You are "equal weight" emerging mkts. Does this mean the same percentage exposure as domestic exposure?
When I read your comments about Turkey, I realize how poorly informed I am about the fundamentals of the different emerging country mkts. I have spent the last decade trying to buy the nasdaq and capture its upward moves. That game may be dead. Do you have a source that I might use as a primer about the differnt mkts? It might help give some additional meaning to the price charts for these mkts.
My idea of equal weight is 7%. I am about there in most accounts. A long time ago I stumbled accross something that came up with that number as equalwight vs the world's market cap. That may be different now.
Jyske Bank is a good resource for information about rate hikes, data points and so on. Just click on the Emerging Market link. I can't vouch for their conclusions but just getting info I will vouch for.
Another thing I would suggest is an Emerging Market news search from Yahoo or Google, I get all sorts of good info that way.
I have a philosophical problem with emerging markets equities being viewed as a separate asset class. It seems to me that they are mostly a surrogate for the commodities (ex-energy) asset class.
Accordingly, in constructing a portfolio, Occam's Razor should apply -
"entia non sunt multiplicanda praeter necessitatem,"
which translates to:
"entities should not be multiplied beyond necessity."
I propose the "William of Occam Portfolio" with the following asset classes:
Gold -
Oil - (Nat Gas, Oil Service etc.)
Commodities - (ex energy)
Bonds - (Cash, Notes, MLP's Conv Securities, Other Currencies, Interest paying REITS, etc.
Equities - (diversified to limit company/sector specific risk using mkt. indexes, sector indexes & common stocks.) - It excludes any equity used in other classes, i.e.
Exxon Mobil, Gold Miner shares, Phelps Dodge,etc.
The maximum allowed would be 60% in any class, the minimum allowed in any class would be 10%.
Og
OG,
Great comment and fair point. SE Asia sort of refutes the commodity-only idea.
But I tend to view all holdings as having multiple roles. EM typically offers exposure to different types of economies and most of these markets are at different points in the economic and stock market cycles which is a big draw for me.
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