Monday, August 19, 2013
"People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage." --Doug Larson
Emerging-market equities have remained sharply out of favor with investors. Especially with the S&P 500 Index recently climbing to a new all-time zenith, the dramatic underperformance by emerging markets is an irrational disparity which will be resolved partially through lower valuations for U.S. and other developed-market equities, but primarily through higher prices for stocks in countries including Brazil, Russia, Chile, Peru, India, and Vietnam. Some other emerging-market countries including China have already been experiencing moderate recoveries in recent weeks. Meanwhile, certain subsectors are especially depressed: SCIF, a fund of just under one hundred small companies in India, has been slumping as smallcap Indian shares are at their lowest valuations since the summer of 2009. Even after its recent modest pullback, most U.S. equities have more than doubled from their July 2009 lows and have gained even more if you go back to early March 2009. It doesn't make sense that U.S. price-earnings ratios are roughly double those of many emerging-market countries which have higher GDP growth rates and comparable future earnings' potential.
Therefore, I believe that it makes sense to purchase the shares of those commodity producers and emerging-market equities which have barely begun to rebound from their recent irrationally oversold conditions. Other than SCIF which I mentioned in the previous paragraph, EWZ and RSX remain undervalued, while ECH and EPU are two other funds of South American shares which are surprisingly cheap. As of July 31, 2013, SCIF had an average P/E ratio of 7.87, while RSX sported an average price-earnings ratio of 6.21.
Why have investors not been buying the shares of mining companies or those located in emerging nations? There are many explanations which you will find on the internet, but the real reason is that no one wants to buy something unless lots of other people have also been buying. Investors perceive a low price as proof of an asset's inferiority, regardless of the fundamentals of the situation. Most people are followers rather than leaders, and don't want to be among the first to participate in any idea. This is why they say that the best time to buy anything is always last year; whenever it is most timely to purchase something, the media are telling you every day why you should avoid it. By the time that you hear positive coverage on cable TV and analysts begin to upgrade anything, it has already been in a strong uptrend and it is too late to obtain a compelling bargain.
Nearly all financial advisors and the vast majority of analysts have been recommending assets which pay above-average dividends, thereby causing many such securities to become dangerously overvalued. These include consumer staples, health-care stocks, telecommunications companies, REITs, and similar holdings. I believe that all of the above have initiated multi-year bear markets which will be especially devastating since so many people have decided to participate in these overcrowded concepts.
Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In recent months I have also been buying the shares of emerging-market country funds. From my largest to my smallest position, I currently own GDXJ, KOL, XME, SLX, REMX, GDX, COPX, SIL, GXG, GLDX, VGPMX, RSX, EWZ, SCIF, ECH, VNM, EPU, FCG, BGEIX, ZJG (Toronto), and PLTM. I have significantly reduced my total cash position during the past two months in order to increase my holdings of the above assets.
Posted by TrueContrarian at 7:28 AM