It seems the next big "opportunity" everyone was talking about,
the emerging and frontier markets, turned out to be just
another unfortunate example on a long list of bad advice from Wall
Street. This kind of canned advice to try to sell the
frontier markets to investors certainly fit the usual Wall Street
script nicely though.
These tactics usually come with some supposedly good fundamental
backdrop, typically include a powerful potential growth story, and
almost always sport historical market returns that are
robust. Unfortunately, making money in the markets requires a
little more than pretty descriptive stories.
Emerging markets refers to countries like Brazil, China, India,
and others where their economies are in the midst of becoming fully
industrialized. Frontier markets refers to even tinier countries in
the same growth curve like Nigeria
(NYSEARCA:NGE) and Vietnam (NYSEARCA:VNM).
Stocks in these countries were the darling suggestions of Wall
Street in 2012 and 2013 with the smaller, harder to access ones
touted as great spots for your money. These markets had
"growing economies, thriving local consumer markets, and access to
smaller, more opportune businesses", they clamored. An even
better reason to buy was because, "they provide great
diversification for your portfolio".
It seems everyone wanted a piece of the emerging market
action. As a recent Barron's article from March 18 explained
while supporting the notion of buying into the theme, "that's why
institutional investors, including endowments and pension funds,
are increasingly assembling teams of specialists to parse their
allocation to emerging markets."
Unfortunately, it seems everyone was returns chasing, not
looking at the charts, and was certainly not noticing what we were
noticing. Buying at the right price is what makes you money,
and buying at any price, no matter what it is, is never a good
The Reality of the Periphery
Take a look at the chart below (updated through late June) which
was included in our latest ETF Profit Strategy Newsletter and what
do you see? If you aren't located in the Northern Hemisphere
with a temperate climate, then your equity markets (NYSEARCA:EWZ)
are down, with some getting crushed.
Only a handful of equity markets around the world (NYSEARCA:VT) are
higher YTD, and the U.S. (NYSEARCA:IWM) and Japanese
(NYSEARCA:EWJ) markets stand alone as the only ones up
This is something we were focused on back in March when our
Profit Strategy Newsletter
warned, "The early signs of a potential bear market in stocks is
already manifesting itself in the price action of major emerging
market funds like the Vanguard FTSE Emerging Markets ETF
That same week in March, Barron's suggested buying all of these
frontier and emerging markets, but we warned against it in our
MegaTheme section of the Newsletter. "Emerging market stocks
are lagging developed markets and could be a sign of a tiring stock
market bull. Lackluster performance is especially notable in
China, Russia, and the Middle East".
We included the below chart that helped show the reality of the
world's situation along with supporting commentary that explained
why emerging markets are not where you want to be.
Instead we suggested capitalizingon the obvious downtrend and
deterioration of emerging markets through our weekly ETF
pick. On March 20 we wrote:
"Russian stocks inside the Market VectorsRussia ETF
(NYSEARCA:RSX) have lost 6.8% YTD and have been lagging
globalequity markets (fyi shown above in the world chart, they are
now down 17%). Aggressive traders can buy the Direxion
DailyRussia Bear 3x Shares (NYSEARCA:RUSS)between
We closed thattrade a few weeks later as we suggested taking half
of the profits at $19.50(12% gain) and moved remaining stops up to
It was clear to us thatsomething negative was occurring in the
world's periphery as the former marketleaders of the last few years
were quickly becoming this year's laggards.
Wall Street stuck to its usualscript, though, and lost those taking
its advice significant amounts of money.
Have Things Changed?
Since March things have onlygotten worse for the periphery
markets. The final chart below plots the performance of many
of the popularemerging and frontier market ETFs since the beginning
of the year along withthe dashed line S&P 500
(NYSEARCA:SPY). The vertical line shows what has happened
since March, when Wall Streetwas laying on the bullish frontier
theme very thick.
Many of these ETFs, such as the iShares Emerging Markets Bond Fund
(NYSEARCA:EMB), are nowdown around 10%, and the Guggenheim Frontier
Markets ETF (NYSEARCA:FRN) is now ina bear market, down over 20% in
only half a year.
To add insult to injury many of these Emerging markets are back at
price levels last seen in 2011, with some flirting with late 2009
price levels. This means the average investor in these funds
has not made any money the last few years.
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