In Defence of Emerging Markets

The global market is in crisis mode…but I guess you already know that.

In times of a bear market, investors tend to panic. They become irrational in the face of losses. That fear reinforces selling, deleveraging and down-sizing, until the market eventually settles at a point below its fundamentals. Once it hits oversold territory bargain-hunters enter to produce a renewed rally towards recovery.

You probably know that I have been a long-time bull on emerging markets. After all, I came from one. And I own plenty of assets there. But right now it is extremely difficult to tell investors to remain bullish on emerging markets, not when emerging markets are at the core of this global crisis.

Some readers have questioned my belief in emerging markets and my methods in analysing them.

Am I still bullish on emerging markets? Of course I am. I can’t wait to buy more assets in emerging markets, especially the South East Asian economies.

However, I am a long term investor. I don’t look at one crisis and think ‘that is it’. I look at long term data and it tells me emerging markets do well overtime. What I have come to realise is that many investors who claim to be long term investors are kidding themselves. As soon as the markets take a turn for the worse, they head for the exit.

With that said, I am not denying there are problems with emerging markets and indeed the wider global economy. The ‘multi-dimensional’ reforms in China are a unique event to hit global markets. The collapse in commodities was due to a profound technological change in shale oil and shale gas. I won’t hesitate to include central bank excess as one of the influencers on the global markets.

And it looks like the consumer credit market in China is starting to wobble a bit. Defaults are on the rise. And corrupt officials are fleeing the country with massive amounts of money.

But despite all the negative press and fear, here’s the thing…It’s not really a big deal.

If you really hate the emerging market, short it.

As I read through the letters of discontent on how ‘disastrous’ emerging market stocks have done, one thought crosses my mind. If you are truly bearish on emerging markets — short them.

Or at least go into cash. There is nothing wrong with either choice.

The market is made of individuals, and when the market is volatile investors hold very different views. Then, when markets are doing well, everybody is bullish. And when it is not, everybody is very bearish.

So if you’re in the bearish camp on emerging markets today, go short. Of course shorting is not an easy thing to do.

Try constructing a short-only portfolio first…Go to the ASX and consistently pick out stocks that will go down in value. That’s how you construct a short portfolio. Sounds easy right? Not so fast.

Remember, most stocks go up in value in the long term, simply because most businesses create value instead of destroying value over time. Even if they fall, the downside is simply capped by 100% (you can’t lose more than the value of your stock), whereas the upside is not capped. Stocks can gain multi-hundreds of percent. Think of Commonwealth bank of Australia [ASX:CBA] and BHP Billiton [ASX:BHP]. CBA has gained 200% since the year 2000 and BHP was up almost 600% at the height of the commodity bull market.

It is why our economy grows at positive rates and not negative.

Long-only portfolios are by far the most straight-forward approach to investing for most institutions and retail investors.

Now that doesn’t mean that emerging markets — and in fact the entire global market — aren’t going through a period of downward pressure. Of course they are.

Market excess led to a long bull market, and this is logically now followed by a correction in the form of a bear market. But I have zero doubt that a bull market will resurface. And when it does, emerging markets will offer some of the best gains out there.

In the meantime, if you’ve got the stomach for it and you’re convinced the rebound isn’t just around the corner, you can always go short.

Emerging trends is another matter.

For the past few years I’ve focused my investment microscope on emerging markets. And I will continue to keep emerging markets in tight focus. However, to capture the best emerging opportunities, I’m expanding my outlook and also analysing promising emerging trends.

Emerging trends is an abstract concept. To me, trends need to carry some form of predictive power. If artificial intelligence and driverless cars are identified as emerging trends, then the best companies in those fields should create a lot of value.

Those are the companies you want to be investing in before they make the mainstream headlines.

Trends can also directly relate to stock prices. Positive trends in stock prices can produce a short term momentum in the share price until that trend eventually fades away. That is, in essence, momentum investing.

I’ll have more for you on how to spot the best emerging trends, and potentially profit from them soon. Until then, happy investing.

Ken Wangdong,

Editor, New Frontier Investor

From the Port Phillip Publishing Library

Special Report: The biggest stock gains can come from the least likely places. While the ASX fell 9% in the 12 months to November 2015, one tiny, hated mining stock soared 1,200%. What seemed like an ugly, bad investment quickly transformed every $5,000 worth of shares into $65,000. This is the power of ‘10-bagger’ companies. Where will the next one come from? Read Greg Canavan’s special Crisis & Opportunity presentation to find out…[more]

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