The Syria Effect: Emerging Markets On Sale - Attention Contrarians And Rational Investors

by: Craig Brockie

On Tuesday, the big international news was about the U.S. being set to invade Syria. Like most peace-loving global citizens, I hope this doesn't come to fruition. As a contrarian investor though, some exceptional opportunities have surfaced that I feel are worth taking advantage of, regardless of what happens in Syria.

The following snapshot from my iPhone stocks app tells the tale. To familiarize you, the following symbols all represent exchange-traded funds in various emerging markets. Specifically, they are Egypt (NYSEARCA:EGPT), Turkey (NYSEARCA:TUR), India (NYSEARCA:SCIF), Indonesia (NYSEARCA:IDX) and (NYSEARCA:IDXJ), Vietnam (NYSEARCA:VNM) and Thailand (NYSEARCA:THD).

Emerging markets hammered
(Click to enlarge)

I've highlighted IDXJ and shown its 2-year chart as I believe it's got the most upside potential of the lot. The reason being is that IDXJ has collapsed the most and will almost double if it regains its May high. I prefer buying funds that have dropped the most in percentage terms as even a partial recovery can often lead to increases of 30-50%. Next, let's evaluate if the above price activity for the countries listed is rational.

First of all, as much as the media and their advertisers would like you to believe, the news has little to no real effect on the market. If anything, its effect is to temporarily exaggerate a trend that is already well underway. There are countless examples to support this statement, which a study in socionomics will make evident. But let's take one major event as a case study. Below is the chart for the S&P 500 index (SPX) for the second half of 2001.

911 stock chart
(Click to enlarge)

As we all know, on September 11th, America suffered a horrible tragedy. It even led to the New York Stock Exchange closing for several days. What's important to note though, is that as of 9/11 we had already been in a bear market for a year and half. The market was already down 30% before the planes hit. What's also important to note are the two arrows I've added to the chart above. The red one shows September 11th and the green one shows how the market had fully recovered within a month, in mid October. What's more, despite the whole world being shell-shocked and amidst anthrax scares and other media fear mongering, the market continued to rally for the balance of the year.

Even if we were to assume that the news actually has an important, lasting effect on the market, let's consider Tuesday's emerging market collapse a bit more closely. I can understand Syria's neighbors like Turkey and Egypt being affected, but does it make any sense that India, Indonesia, Vietnam and Thailand collapsed as well? The closest of these countries is over 3,000 miles away.

Let's ignore the current media propaganda and consider what's really happening in emerging markets today. Much like the gold market had been up until June of this year, emerging markets have been in a downtrend since 2011. And much like the gold market earlier this year, emerging markets have collapsed in the final phase of their bear markets. And much like gold this year, almost everyone thinks I'm crazy to be buying emerging markets right now or even suggesting them for consideration. Perfect. That's how contrarians roll. As Mark Twain once said, "whenever you find yourself on the side of the majority, it's time to pause and reflect."

As my previous articles point out, I believe U.S. Treasuries have been in a bear market for over a year, the same for defensive stocks since May and the U.S. dollar has been in a bear market since early July. Furthermore, gold has been in a vicious bull market since June with the metal increasing 20% in just two months! Gold stocks, which I'm even more fond of, have exploded in value, with the junior gold mining fund (NYSEARCA:GDXJ) up 65%. No, this is not a misprint.

U.S. markets appear to be near their highs for this cycle and emerging markets are extremely cheap in comparison. The last time the U.S. stock markets peaked (in 2007), they were followed by booms in commodities and emerging markets. I expect the same this time around.

I sometimes get criticized for not providing fundamental reasons for buying various assets. While contrarian investing is based more on taking advantage of investor irrationality rather than identifying absolute value, the two often go hand in hand. Looking at Indonesian stocks, IDXJ is currently sporting a price to earnings ratio of five, which is a third of the S&P 500. Furthermore, as of Tuesday's close, IDX was selling at a 7.6% discount to its net asset value.

If your favorite gadget or grocery store item was marked down 50%, you'd probably snap up that bargain. For many irrational reasons, which I won't go into now, most investors fail to apply this logic to investments. I think it's wise to snap up the bargains in emerging markets right now, which what I've been doing for myself and clients. Take a look at the gold market to see what can happen if one hesitates -- you get left behind thinking shoulda, coulda, woulda.

Thanks for following me here on Seeking Alpha and sharing your comments. I read them all and appreciate your feedback.

Disclosure: I am long IDXJ, IDX, SCIF, TUR, THD, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.