It's Time to Get Into This Hated Sector…
Headlines like this drive me nuts…
“Emerging markets bear will growl for years.”
That was written by a prominent Marketwatch columnist and retirement “expert” in late June 2015.
In the article, the author tells you to sell any shares of dedicated emerging markets ETFs you own because it will take “years” for EM stocks to recover from their slump.
It turns out it only took six months. Emerging markets stocks are up big this year. And if you followed that “expert” advice, you lost out on some serious gains.
Yet another example of media noise getting in the way of investors making money in the markets.
But today, I have a remedy for you…
Emerging Markets Have Taken a Beating
Emerging markets have been beaten down the past five years. Since 2011, emerging market stocks have returned -11%.
Here are some reasons why…
China, the main driver of emerging market economic growth, has faltered.
China has reported growth rates routinely above 8% and as high as 14% in 2007. But those rates have slowed in recent years. And its growth of only 6.8% in 2015 was its slowest rate in 25 years.
China accounts for 30% of the economic activity of the emerging economies, so its slowdown has dragged the group down.
This includes the emerging markets commodities producers that have supplied China’s economy.
There have been slowdowns in demand for things like Brazilian steel, Indonesian coal and Chilean copper.
And then there’s oil…
China’s declining demand plus the shale oil revolution in the U.S. have helped cause a big decline in energy prices.
That’s hurt countries like Brazil, Russia, Venezuela and Nigeria that rely heavily on oil and gas revenue.
Then throw into the mix instability such as Russia’s conflict with Ukraine, massive corruption and political turmoil in Brazil, and the complete collapse of Venezuela.
The bottom line is there’s been heavy downward pressures on emerging markets.
But this year, EMs have shown signs of strength…
Reversal of Fortune
Emerging market stocks have been on a tear this year…
The iShares MSCI Emerging Markets ETF (NYSE:EEM) is up 17% year-to-date.
Here are some reasons why…
Massive across-the-board interest-rate cuts and central bank bond buying in developed countries have forced investors into higher-yielding emerging markets.
Why get negative yields when you can get 6% in emerging markets?
The price of oil has also recovered. Oil was at $28 per barrel in January. Today, it’s at $46 per barrel.
And more recently, U.S. dollar weakness has boosted developing countries. A weaker dollar makes it easier for emerging market countries to service debt, which is mostly denominated in U.S. dollars.
Plus, a depreciating dollar helps support prices for raw materials, of which many emerging market countries are large exporters.
These factors have given a boost to emerging market stocks. And it appears there’s more room for them to run…
My trend following system shows that emerging markets are still in an uptrend.
Remember, trends always go farther than we can imagine or know. The important thing is to remain focused on price action, not opinion or speculation.
And always, protect your downside with stops. We always need chips to play the game!
Please send me your comments to firstname.lastname@example.org. Let me know what you think about today’s issue.