On Wall Street they say that it's easy for people to forgive you for being bullish in a bear market -- I know some "investment professionals" that are constantly falsely bullish because of this. But, they also say that people have much harder time forgiving you for being bearish as the market is going up. And the U.S. market has been going up… The S&P 500 is coming off of the best September for stocks in 71 years and many wonder if the rally will continue. The U.S. economy is sluggish, despite the government's pronouncement that the recession ended in June 2009. Consumers are understandably gloomy as near-10% unemployment -- and some say that number is grossly-underreported due to the people that have stopped looking for work and are now out of the labor force -- is causing confidence levels to stay at recessionary levels. September consumer confidence dropped to 48.5 from a lower revised 53.2 in August, even as stocks massively rallied. There is a widening disconnect between consumers' perception of the U.S. economy and the government interpretation of the economic state of affairs. As this index goes, a confidence number of 90 or above indicates a positive view on the economy -- and the current number is lower than the lowest number from the 2001 recession and close to the absolute low in 30 years. There is also a widening disconnect between the performance of the stock market and the mutual fund flows that are supposed to direct it. In fact, this week marked an unprecedented 21 weeks in a row of mutual fund outflows -- bringing the total outflow to more than $70 billion. If you add the outflows from ETFs to that number, the total outflow is more than $80 billion. I suppose you cannot expect people that have little confidence in their job security or the course of the U.S. economy -- as the above numbers indicate -- to put money in mutual funds whose performance is driven by that very economy. BRICs Have Superior FundamentalsI have a unique advantage over the permabears -- while I too am bearish on developed markets from a longer-term strategic perspective, I am very bullish on emerging markets. So, if you point out that the S&P 500 has been going up, despite my not liking it, I'll point out that I like markets that have done so much better! I know that I cannot make every tactical trade work, but as long as the strategy is sound, it all works out in the end. Why do we care about notably-depressed U.S. consumer confidence at the moment if the best long-term secular growth stories for investors are in emerging markets, namely our favorite BRIC markets? This is because U.S. consumers are still a major driving force in the global economy and they comprise nearly 70% of U.S. economic activity. Whether we like it or not, U.S. consumers do affect our favorite BRIC markets. Over the long-term, I am not bullish on the S&P 500 as I don't like the debt-driven growth cyclethat has put the U.S. economy at a disadvantage. But, I am rooting for the U.S. market to do as well as possible because my favorite markets will do even better under this scenario.
For the BRIC markets to do well and make good money for emerging market investors, we don't need a great economy in the U.S. We don't even need a decent economy. All we need is for the U.S. economy to hold together and muddle through -- no matter how slow the pace -- as our BRIC markets have different economic models. They have better demographics, and much lower total-debt-to-GDP levels. And overall, emerging markets save and invest -- rather than borrow and spend -- in order to grow. This results in a much more sustainable path of economic development and higher returns for investors over a longer period of time.
In fact, even as the S&P 500 has rallied nearly 10% off the August 27 low, the BRIC markets largely either matched or beat the S&P 500's performance. Russia lagged by half a percent as measured by the Market Vectors Russia ETF (NYSE: RSX) as crude oil was up only 6.2% in that time frame. The Russian market is the most highly-correlated to the price of crude oil than any of the BRICs, which makes it the most volatile and usually the cheapest market on a valuation basis. The valuation discount comes to compensate also for the higher (perceived) political risk in Russia. Russia Is Not As Evil As You ThinkMany investors don't like how Putin handles matters in Russia. And I don't particularly like it either, but, history shows that nothing other than a strong-armed approach has worked there. So, I would rather have Putin be Putin and have him set Russia on the right course. In the Yeltsin era, when the extreme left-wing parties (like communists) were a lot more popular there than they are right now, we had economic and political chaos. The Russian Small-Cap Micex index has been doing very well -- up 30% year-to-date. And the Russian Mid-Cap Micex index is up 33%, while the Russian Large-Cap Micex index is up only 3%. Unfortunately, while we have small-cap ETFs from both India and Brazil, we don't have a small-cap ETF from Russia to play this trend. But, the huge companies that dominate the large-cap index and the RSX ETF are pretty good values at present. The largest Russian energy company -- Gazprom (OTC: OGZPY) -- now trades at one-third of the value reached in 2008. The natural gas giant still dominates the European natural gas markets and has a very promising oil subsidiary -- Gazprom Neft (OTC:GZPFY) -- which has generally seen stronger market performance than its parent. This is because Gazprom Neft is a smaller company with just an $18 billion market cap and it grows faster, while Gazprom itself moves the Russian large-cap index disproportionately with its market cap of $125 billion. On the other hand, Lukoil (OTC: LUKOY) is now trading at six times earnings after advancing from $44 to $56 since the May bottom in BRIC markets (then it was trading at a PE of less than five!). So, I would view the slow performance of Russian large caps in the RSX, and Lukoil in particular, as an opportunity for long-term investors interested in emerging markets. To see more values in emerging markets that we have found -- including the latest portfolio recommendation as a way to play the Russian consumer . Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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