More Emerging Market

Yesterday as I was reading an article by Tim Middleton about selling out of emerging markets I had the following question hit my in box.

what do you think about this increasing emerging markets nervousness? Do you think money flow might come back to the US as a flight to safety (or maybe lately I’ve been thinking to Europe due to the strengthening euro)? I think maybe the the bear market does not really start until money flow to the US is at a high (like in 2000).

As I read Tim’s article he clearly thinks more downside is ahead, based on past declines, and he is on board with selling now but I am not sure if he explicitly thinks investors should sell to zero weight. To be clear I do not advocate zero exposure.

I wrote several times before the month long slide about the potential for emerging markets to correct at some point. I was not making a prediction so much as pointing out that hot asset classes usually correct in one way or another. In these posts I noted that markets are attractive investment destinations for different reasons. Brazil and Chile have resources that the world needs. The pricing of their resources may fluctuate but in the big picture, global demand is increasing in China and India (soon Vietnam and Pakistan) and there is not much correlation to the western economic cycle.

Places like Singapore and Malaysia manufacture and export electronics and other things so they are more dependent on western demand and more susceptible western economic cycles.

Turkey, Hungary and Vietnam are really living in their own world so to speak. They each have internal catalysts that will either pan out or not (my take is that they will pan out even if it takes a while).

The current move is a panic of some sort. Obviously at some point in the rally in emerging market equities speculative and unsophisticated money moved in and now some (maybe all?) has moved out.

Between the comments left here and email I received at my account many people had way too much exposure in emerging market equities. I targeted 7% as the right weight for me, my exposure grew to be more than that and I cut back having no great inkling there would be a decline like this. Many people had 20% or more in emerging which, in terms of strategy, seems to be a repeat of mistakes made by owning too much tech in 2000, of course the consequences so far are much less severe.

To the readers question, will money flow back into the US and Western Europe? The short answer is yes but the longer answer is that it won’t be enough, by itself, to create upward pressure on developed market equities. The dollar volume sold of the emerging market stocks is too small to have a lasting effect.

There have been comments before asking whether or not sell. My opinion is always the same, sell if you think you have too much. Having zero is a very specific bet, one that I am not willing to make with other peoples’ money.


  1. Hi Roger – I’m the one that posted the comment earlier. I think having a zero exposure to emerging markets in the short term is not a terrible idea, as long as some international exposure (Europe, Japan) may be maintained. I think the key is rather what does your domestic portfolio look like? If you have a lot of high beta stocks at home already, I see no reason why not to decrease your portfolio volatility.

    Also I think too many people are not nimble enough to get out of these country specific ETFs quickly enough. Look at EWZ, TRF, IFN, which have been literally hammered 20-30%. I just selling country specifics and buying the EEF might be done as well.

    One last question: do you think Eurozone might not become the next safehaven? With the strengthening euro, less worries about dollar depreciation, and many of these countries are on the road to economic recovery, don’t have trade deficits, and haven’t been run up yet. I keep thinking that the funds wont return to the US en force with our incredible deficit running along.

  2. It would have been nice for Tim to tell us to close the barn door while we still had the horse.


  3. To the first comment,

    On one hand you say zero for the short term might make sense but later on you question the nimbleness of most people. That people are probably not that nimble is exactly the reason why I do not believe in zero.

  4. Roger,
    You have advocated having an exit plan on each position you maintain for as long as I have been reading your comments. Lord, I wish I had been that smart 6 years ago. I was neither diversified nor educated about different asset classes when the bubble burst. Being somewhat hard headed, I had to learn some rather expensive lessons about investing my own hard earned money. Reading your thoughts about investing has been educational and profitable going through these volatile markets. Thank you. Tom in Indy

  5. @ #1:
    what havn’t been run up yet is US-equities. Compare the performance between the leading European and American indexes, and compare the volatility…


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