Emerging Markets Want 'QEternity'


Over the past few years, "QEternity" is the humorous moniker that's been used to describe the Federal Reserve's seemingly never ending monetary stimulus. But the beginning of the end of QE  and one of the most liberal monetary experiments in human history is nigh.

Central banks from emerging market countries like Brazil (NYSEARCA:EWZ),  India (NYSEARCA:INDY), Indonesia (NYSEARCA:IDX), and Turkey (NYSEARCA:TUR) are already taking aggressive steps to prepare for massive capital outflows ahead of the Fed's decelerated asset purchases.

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But as money flows away from emerging economies back into to developed countries, funding future economic growth and servicing debt becomes more difficult. Also, there's the problem of containing inflation, which is still too high in BRIC nations (NYSEARCA:BKF) like Brazil and India.

Emerging markets have been among the greatest beneficiaries of the Federal Reserve's five-year easy money cycle. Essentially, Bernanke & Co. encouraged the "risk-on" trade of owning riskier assets by pushing investors out of low-yielding "safe" assets.  

Since December 1, 2008, emerging market equity ETFs (NYSEARCA:VWO) have jumped around 71% compared to a 51% increase in stocks from developed market countries (NYSEARCA:EFA) like Australia, Canada, and Japan.

From a valuation perspective, emerging market stocks are at their cheapest levels relative to the S&P 500 (NYSEARCA:IVV) in five years.  (See chart below.) But buyer beware. The "cheap valuation" argument is only a good entry point for emerging market investors who want to get stung by the value trap. Price action is saying lower prices are ahead.

Because stock prices are always a leading indicator, we've used the relative weakness in emerging market stocks to cash in.

In an 8/7/13 update via our Weekly ETF Picks, we wrote to subscribers:

"Almost half of VWO country representation is in just three countries: China, Brazil, and Taiwan. And all three countries have underperformed relative to developed stocks. On June 24, VWO hit is yearly low of $36.50 and right now technical indicators are telling us that a retest of yearly lows is probable."

Via our intraday alert last week, we sold half our recommended ETF position in our 8/7 report in the VWO Oct 2013 put options for a 65% two-week gain and we're still riding the other half. Our other position in EUM, which aims for 100% opposite daily performance to emerging market stocks was sold for a small profit too.

The ETF Profit Strategy Newsletter uses a combination of market sentiment, fundamental/technical analysis and common sense to be on the right side of the market. Since the beginning of the year, 78% of our time stamped ETF picks have turned a profit. (through 6/30/13)

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