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 (NGE) and Vietnam (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 strategy.
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 (EWZ) are down, with some getting crushed.
This is something we were focused on back in March when our April ETF 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 (VWO)".
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 (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 (RUSS)between $17.50-$18.00".
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 breakeven.
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 (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 (EMB), are nowdown around 10%, and the Guggenheim Frontier Markets ETF (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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