“China’s growth rate is dropping.”
“Investors have been fleeing emerging-market investments.”
When you see headlines like those for months on end, you run into a different risk — one that can cost you even-more money.
That’s because a bad-news overdose can make you give up at just the wrong time. Emerging markets are only the latest example.
In reality, no trend lasts forever. Stocks, funds and entire markets get overbought and oversold. Spotting reversals in worldwide investment trends is a huge part of my job. I look for evidence that a downward spiral is ready to rebound, or that a bullish uptrend is near exhaustion.
Identifying those trend reversals can lead directly to outsized portfolio gains — but sometimes you have to ignore the headlines.
The media usually reports the facts accurately, more or less. Emerging-market benchmarks have indeed been retreating for some time.
Earlier this month I wrote about some subtle clues that China is gaining economic momentum. Now some of those clues are in plain sight for more people to see.
In addition to growing domestic demand from China’s expanding affluent and middle classes, some export customers show signs of growth, too.
- Germany seems to be doing fine …
- The U.K. is getting it economy dialed in, while …
- The rest of Europe is stabilizing after a rough few years.
Over here in the U.S., economic reports are starting to use words like “improving” and “moderate growth” instead of “lackluster” or “sluggish growth.”
Yes, the progress is slow — but it’s still progress.
As for China, industrial output grew 10.4% year-on-year in August, up from a 9.75% pace in July. Retail sales in August rose 13.4% from a year earlier, with the annualized pace accelerating from 13.2% the previous month.
The data confirms what I see elsewhere. Millions of Chinese consumers are in a spending mood.
In addition, fixed-asset investment (a great confidence indicator) rose 20.3% year-over-year in August, up from 20.1% in July. And Chinese Premier Li Keqiang said recently that the country’s economy is in a new growth phase. His tone was optimistic as he talked about stable and sustainable development.
Getting China back in gear will help other developing nations, too — especially those supplying ores, energy and other raw materials to the giant Asian manufacturing juggernaut.
Want More Evidence?
We have more than just circumstantial evidence. Emerging markets are responding to their adrenalin shot, as you can see in the table below.
Starting with all ETFs available to U.S. investors, I filtered out leveraged and inverse trading vehicles. Then I removed “small fry” ETFs with less than $20 million in net assets. Then I ranked the resulting 609 ETFs by their performance over the two-month period through Sept. 13 — last Friday.
Only 30 ETFs make the top 5%. Twelve of those 30 are in the “Emerging Market” category. Seven are pure China plays. The others include ETFs representing Egypt, South Korea, South Africa, Russia and a hybrid “Chindia” ETF split between China and India.
The Top 5% of Equity ETF Performers for the Past 3 Months
Included 12 Emerging Market Funds!
This group shows intriguing geographic diversity. Investors in the Market Vectors Egypt Index ETF (EGPT) look a lot more confident than the headlines lead you to think. I suspect they know things about the socially, economically and politically tumultuous nation that aren’t apparent on TV newscasts.
When 40% of the top 5% ETF performers are from a beaten-down category like emerging-market ETFs, I pay attention. A deeper look made me even more interested.
Punish the Winners?
While two months is obviously a short period, we still seem to be early in the emerging-market turnaround game. Five of the funds in the table suffered net investor outflows even as their performance overshadowed 95% of their ETF competitors.
The aggregate investment flow for the dozen ETFs on the list was negative $283.5 million. Investors actually bailed out of this summer’s star performers. Why? The most likely reason is simple: Investors still aren’t fully convinced that a new upward trend is in place.
To be honest, I’m not fully convinced, either. I would rather be patient — especially since some of our recommendations are already poised to take advantage of a major reversal.
If this reversal is real, I think it is still in the early stages. All dozen ETFs in the table show double-digit three-month percentage gains — but only three did the same on a year-to-date basis. Five were actually down for the calendar year through last week.
I plan to keep a serious eye on the beaten-down emerging markets, looking especially for signs a bull market is taking shape.
Before I go: As I was about to file this column for publication, I received a new report from Capital Economics Ltd., the London-based research powerhouse. The title made me stop: “Emerging-Market Equities Stop Underperforming.”
The date on their report is Sept. 16, 2013. I had to laugh because I had just written almost the same thing for you, on the same day, on the other side of the Atlantic Ocean.
Do great minds think alike? Maybe. But it goes to show that there are plenty of people who are watching for the next big trend. And if you stick with me, you’ll be just ahead of the curve … and that’s the best place to be!
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