Stocktake: Emerging markets looking ‘increasingly buyable’

Why ‘dumb neighbours getting richer than you’ provides an invaluable lesson for us all

September 10th, 2008. If a survey by robo-advisory firm Betterment survey is a guide, most people in Ireland have little idea the last decade was a good time to be invested in stocks. Photograph: Jeremy Bales/Bloomberg News

September 10th, 2008. If a survey by robo-advisory firm Betterment survey is a guide, most people in Ireland have little idea the last decade was a good time to be invested in stocks. Photograph: Jeremy Bales/Bloomberg News

 

It’s been a miserable year for emerging markets, which fell into a bear market last month, but a turning point may be at hand for a region that looks “increasingly buyable”. So says LPL Research, which points to a number of indicators suggesting bearish sentiment is now “approaching extreme levels”. Firstly, the gold-silver ratio, which measures how many ounces of silver it takes to buy one ounce of gold and which spikes in times of crisis, recently exceeded 85. That mirrors levels recorded during the 2008 global financial crisis, and the three previous times the ratio was around 80 all marked emerging market lows.

Secondly, with US markets at all-time highs, the emerging market–US divergence is at levels unseen since the mid-1990s. The gap could close if US stocks drop, but LPL thinks emerging market gains are more likely.

Thirdly, just 35 per cent of emerging market stocks are above their 200-day moving average, “not far” from the 20 per cent level where emerging markets have “typically bottomed out”. That last point is debatable; current breadth levels suggest caution but not the kind of panic one associates with market lows. Instead of plummeting, emerging market stocks have fallen steadily since January. Although “far from the most severe” bear market of the last 30 years, it already ranks as the third longest, notes Bespoke Investment.

Investors just don’t look tempted; the current downturn is also the longest stretch without a 10 per cent rally, says Bespoke. The good news for emerging market investors is that, in the past, when emerging market stocks finally did turn, they bounced nicely, enjoying an average rally of 37 per cent.

No, short sellers are not bearish on Apple

The shorts, sophisticated investors who make money when a stock falls, “have circled Apple on the eve of the tech giant’s highly anticipated iPhone launch”, the Telegraph said last week, adding it was now “America’s most bet-against company”. A number of other outlets made the same claim, following a report from financial analytics firm S3 Partners showing there is now almost $10 billion in short bets against Apple. Yes, that’s more than any other company. However, headlines suggesting investors are “turning extremely negative” on Apple are “nonsensical”, Bespoke Investment points out.

In terms of dollar bets, Apple, Amazon, Microsoft and Facebook occupy four of the top five spots. However, that’s perfectly natural, as they are four of the five most valuable companies in the US. Short interest in Apple, for instance, is less than 1 per cent of its $1.1 trillion market capitalisation – less than short interest in 450 of the stocks on the S&P 500. The stats are similarly low for Amazon, Microsoft and Facebook.

Contrast that with embattled electric car maker Tesla, where a quarter of the stock has been shorted. That’s about 25 times higher than Apple. The most shorted stock? Not by a long shot.

Ignorance is not bliss

That’s quite incredible, and testimony to just how many investors appear permanently scarred by the global financial crisis. Ignorance is not bliss: people who haven’t been saving and investing, who think stock markets are the preserve of reckless gamblers, are “probably going to continue to not save and invest in the future”, said Dan Egan, the director of behavioural finance at Betterment. One can imagine how deep the scars run in Ireland, given the scale of our banking crash. The Iseq, I noted in a recent piece, has more than doubled from pre-Lehman levels. If Betterment’s survey is a guide, most people here have little idea the last decade was actually a perfectly good time to be invested in stocks.

The cause of bubbles – dumb neighbours getting rich

When assets go up, people see their neighbours, who are “dumber than they are”, getting rich. “And their spouse is saying can’t you figure it out, too? It is so contagious.” Dumb neighbours getting richer than you – Buffett’s explanation, tweeted Ritholtz Wealth Management’s Ben Carlson, “explains more about how markets function than all of my finance textbooks from college combined”.

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