Emerging Markets, Submerging Markets
moneysage
more at http://money-sage.com
We have noted the steady ascent in the respectability of "emerging"
markets over the past several years. Indeed, our impressionistic sense
is that the status of this investment sector is gaining luster at an
accelerating pace. Today, "emerging markets," which was a category
historically relegated to the margins of invisibility by investment
pattern-setters in the U.S., have made it to prime time. Not only is
there an abundance of printed and visual media attention to this
investment realm, but there has been an official anointment by Wall
Street. Individual and institutional investors MUST now have an
"emerging market" allocation. These markets, Wall Street opiniom-
makers and investment houses now solemnly intone, have much faster
growth, more dynamic economics, and more rewarding markets, than the
"helpless, pitiful giant" of the U.S. market, to employ Nixonian
rhetoric of yore.
We have no quarrel with the notion that selected foreign economies
will likely grow much faster than the American economy for quite some
time to come. Nor do we doubt that, over the famous "long haul" some
of these markets will perform very well. However, it would be well to
bear in mind that the long-run consists of a succession of short-runs.
In volatile and unsophisticated "emerging" markets, which are
dominated even more by herd emotion than is our own herdy market,
certain "short-runs" could consist of cyclical bear markets of 50-70%.
For those who wish to speculate in these markets, it will be necessary
to either be skillful at market timing, or else have a steel stomach,
bottomless pockets, and an unshakable long-term perspective a la
Buffett.
Since few investors possess these attributes, it would be well to be
attentive to warning signs. The popularity -- and respectability -- of
"emerging markets" has risen in tandem with prices. This is normal.
Enthusiasm grows as the market rises, generally reaching its greatest
intensity at the very top and point of reversal. In other words, the
rise in enthusiasm is a fairly reliable yellow light once it passes a
certain level. While it is true that a market can keep surging through
a series of yellow lights, the ultimate red light ahead comes closer
and closer. One has only to recall the tek stock mania, the
residential real estate/mortgage mania, the Japanese equity and real
estate mania, and countless others.
The emerging markets were ignored when they were dirt cheap -- when
stock valuations were only a fraction of US equity valuations. They
were hated after the crash of 1998-1999.
Today, some emerging markets sell at HIGHER valuations than the US
stock market. Yes, there is greater growth. But there is also GREATER
RISK. MUCH GREATER RISK, in many cases. These risks are military,
political, accounting, corruption, weakly-based and indifferently
protected business practices. There are serious defects in
"transparency," as they say. All too often, investors are buying a pig
in a poke.
Above all, it is the growing popularity and respectability of these
markets which gives cause for concern. The cyclical top, we suspect,
is a lot closer than a bottom. There is simply too much of that warm,
fuzzy feeling for our liking.
We find it curious that today, when large capitalization US stocks are
selling at the LOWEST ABSOLUTE VALUATIONS in well over a decade, and
at extremely attractive valuations RELATIVE to current -- and to
prospective -- interest rates, they are at a low level of popularity
compared to richly valued "emerging" markets. Moreover, American
interest rates are in the DOWN-CYCLE, A FACTOR of DECISIVE IMPORTANCE
for future equity price levels. Many "emerging" markets, in CONTRAST,
are facing powerful headwinds in the form of RISING INTEREST RATES.
We suspect that this "conundrum" -- to quote a very eminent former
central banker -- will find resolution in a revaluation upward of
American stocks and a downward revaluation of "emerging markets."
While this may not occur for a while, the PRUDENT course of action is
clear, we think.