Emerging Markets 01 (May 08 - Dec 11)

[LenaHuat]

She's morphed into a really ugly duckling. K, check out the Chinese website.

[kennynah]

L : sadly, i totally agree...

[winston]

Under the 'Emerging' Curtain By JASON ZWEIG

Behind the world's hottest markets is a cold truth many investors don't want to hear.

Emerging markets -- those developing countries that used to be called "The Third World," like Chile and China, Turkey and Thailand, Brazil and India -- have been hotter than a potful of habanero peppers. The MSCI Emerging Markets index has gained 45% so far this year, versus 9% for the U.S.

And investors have noticed, pouring $10.6 billion into emerging-markets mutual funds so far this year, or more than 34 times the total they added to U.S. stock funds. The iShares MSCI Emerging Markets Index Fund is now the fourth-biggest of all exchange-traded funds, with $30.8 billion in assets.

Investors hope to capture the stunningly high growth of the developing world, especially with the U.S. economy shriveling. In the second quarter of 2009, China's economy officially grew 7.9%, while the U.S. likely contracted about 1.5% in the same period. For all of 2009, Barclays Capital forecasts, the developing economies of Asia will grow 5.2%, while U.S. gross domestic product will shrink by 2.3%.

Unfortunately, high economic growth doesn't ensure high stock returns. "People have hopelessly got the wrong end of the story," warns Elroy Dimson of London Business School, who is one of the world's leading authorities on financial markets.

Based on decades of data from 53 countries, Prof. Dimson has found that the economies with the highest growth produce the lowest stock returns -- by an immense margin. Stocks in countries with the highest economic growth have earned an annual average return of 6%; those in the slowest-growing nations have gained an average of 12% annually.

That isn't a typo. Over the long run, stocks in the world's hottest economies have performed half as well as those in the coldest. When Prof. Dimson presented these findings recently in a guest lecture at a Yale University finance program, "a couple of people just about fell off their chairs," he says. "They couldn't believe it."

But, if you think about this puzzle for a few moments, it's no longer very puzzling. In stock markets, as elsewhere in life, value depends on both quality and price. When you buy into emerging markets, you get better economic growth -- but, at least for now, you don't get in at a better price.

"It's not that China is growing and everybody else thinks it's shrinking," Prof. Dimson says. "You're paying a price that reflects the growth that everybody can see."

In other words, economic growth is high, but stock valuations are even higher. In 2008, as U.S. stocks fell 37.6%, emerging markets crashed 53.3%, according to MSCI. At year end, emerging-markets stocks traded at a 38% discount to U.S. shares, as measured by the ratio of price to earnings. Now that both markets have bounced back, emerging markets are at only a 21% discount. And make no mistake: They should be much cheaper than U.S. stocks, because they are far riskier.

"The logical fallacy is the same one investors fell into with Internet stocks a decade ago," says finance professor Jay Ritter of the University of Florida. "Rapid technological change doesn't necessarily mean that the owners of capital will get the benefits. Neither does rapid economic growth."

High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors. Last year, at least six of the world's 10 largest initial public offerings of stock were in emerging markets. Through June 30, Asia, Latin America, the Mideast and Africa have accounted for 69% of the dollar value of all IPOs world-wide. Growth in those economies will now be spread more thinly across dozens of more companies owned by multitudes of new investors.

The role of emerging markets, says Prof. Dimson, "is to provide diversification, not to add to returns." Having up to 15% of your total U.S. and international stock assets in emerging markets can make sense. But before you jump in with both feet, look at the holdings of the international funds you already own; many keep at least 20% of their assets in developing markets.

Like all performance chasing, this latest investing binge is doomed to disappoint the people who don't understand what they are doing.

http://online.wsj.com/article/SB124846985120879989.html

[winston]

Massive amount of money flowed into Emerging Markets ETF.

Now that they are starting to see the correction in China, do u think they would be pulling their money out or buying on dips ?

[kennynah]

hmm..... i call them to ask...

[helios]

Massive amount of money flowed into Emerging Markets ETF.

Now that they are starting to see the correction in China, do u think they would be pulling their money out or buying on dips ?

Recently, DBS announced an ETF funds right?

[winston]

China dropped 2% yesterday and 1% the day before. So when would the redemptions start ?

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The Bovespa ( Brazil ) index lost 1.1 percent to 55,574.88, dropping from the highest level since Aug. 8. The BM&FBovespa Small Cap index slipped 1.2 percent.

In other Latin American markets, Mexico’s Bolsa slid 1 percent, while Chile’s Ipsa retreated 0.9 percent.

[millionairemind]

Massive amount of money flowed into Emerging Markets ETF.

Now that they are starting to see the correction in China, do u think they would be pulling their money out or buying on dips ?

Recently, DBS announced an ETF funds right?

Not sure if this qualifies as a TOP... but I remember in May last year, there were alot of ads by banks in the newspaper selling newly launched Commodities ETF....you know what happened after that...

[kennynah]

what happened? the banks close shop? conned retailers money and then dissolve the ETFs?

[winston]

A Contrarian Take on Emerging Markets... by Louis Basenese

Highlights in this issue:
Why emerging markets could be the road to ruin, not riches.
Three reasons a sell off is imminent.
Two ways to protect your portfolio immediately.


To say emerging markets are hot right now is an understatement.

The benchmark MSCI Emerging Markets index is up 52% this year, rendering the S&P 500's 11% uptick completely insignificant.

Thanks to the strong performance, investors' love affair with emerging markets keeps getting steamier. Case in point - investors poured $10.6 billion into emerging markets mutual funds so far this year, a whopping 34 times the total invested in U.S. funds.

Yet, while most pundits shout from the rooftops that emerging markets are the place to invest right now, let me offer a dissenting opinion.

Emerging markets investors - and their hard-earned capital - are about to get dumped on their derrieres. Here are three reasons why...

1. Growth Doesn't Pay

The justification for investing in emerging markets has always been the same - growth in emerging markets will far outstrip growth in the developed world and therefore, the profits will be greater.

After all, doesn't it make sense that a company doing business in a country with GDP expanding at a 7% annual clip will earn way more than a company doing business in a country with GDP contracting?

Seems logical and if that's the case, emerging markets are definitely the place to be right now. Barclays estimates developing Asian economies will grow by 5.2% this year, compared to a 2.3% contraction for the United States.

Here's the rub: the classic justification is flawed. High economic growth does lead to higher profits for individual companies. But it doesn't translate into higher stock returns for investors.

Based on decades of data from 53 countries, London Business School professor Elroy Dimson recently proved countries with the highest growth produce the lowest returns (6% per year), while countries with slowest growth produced the highest returns (12% per year).

How can this be? It's simple, really. Attracted to higher growth, investors end up paying higher prices for emerging markets stocks, which cuts into returns.

In other words, when it comes to emerging markets, investors lose their senses and consistently violate the primary rule of investing to buy low and sell high. And that's certainly happening now...

2. Valuations Hardly in Bargain Territory

If success in emerging markets boils down to buying in at the right price, now is not the right time.

The MSCI Emerging Markets Index trades at 17.8 times earnings, the highest level since the index peaked in late 2007. In comparison, the S&P 500 trades at 17.2 times earnings.

Moreover, the historical average for the MSCI index is roughly 14 times earnings, making current prices seem a bit stretched.

3. No Safe Haven... Nasty Corrections Are the Norm

While emerging markets stocks can make you a fortune in a hurry, they can just as easily ruin you. Just consider:

In the six weeks following Lehman's collapse, emerging markets shed 47%, slightly more than the S&P 500 index, proving higher economic growth provides absolutely no buffer.

After advancing more than 20% for five straight years through 2007, emerging markets cratered 53.3% in 2008. Remember, the S&P 500 "only" dropped 37.6% last year.

In 2000, when the U.S. market slid 9.1%, emerging markets tanked 30.8%.

Bottom line, I'm convinced emerging markets are headed for a short-term profit taking correction.

Historical data proves these markets are susceptible to such sell offs. Valuations are getting stretched. And investors have never been more enamored with such stocks.

Even the financial press can't resist the euphoria. Yesterday, Bloomberg ran a feature entitled, "Emerging-Market Stocks to Gain Further After 52% Rally This Year."

But make no mistake. This is a classic case of investors chasing performance. Such a strategy always fails. Or as Humphrey Neill put it in The Art of Contrary Thinking, "When everyone thinks alike, everyone is likely to be wrong."

Don't be everyone.

Instead, consider selling short the MSCI Emerging Markets Index Fund (NSYE: EEM).

Or at the very least, check your asset allocation.

If you've got more than 20% of your portfolio in emerging markets, you could be in store for a nasty setback. To avoid it, I recommend you take some profits off the table while you still can.