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Gary Gordon, ETF Expert (232 clicks)
Bonds, dividend investing, ETF investing, long/short equity
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Nearly every visitor to the CNBC microphone is making the same proclamation; that is, emerging markets can’t handle commodity price inflation as well as developed markets.

The problem with this analysis is the conclusion that each is providing. Specifically, stock assets from the U.S, Japan and the eurozone will outperform the industrializing world.

This has been true for the previous six months ... no doubt about it. The six -month rolling returns for Vanguard Emerging Markets (VWO) approximates 16% whereas the SPDR S&P 500 Trust (SPY) registers 26%. Note: 1000 basis points is nothing to sneeze at.

However, stock markets are forward-looking creatures. In fact, creditor nations in the industrializing world are closing in on their battle to beat inflation, whereas the developed world’s stimulus is still “reflating.” It follows that emerging stocks should rebound long before analysts see it coming, while shares of companies in debt-riddled, deficit spending countries may take an unwelcoming hit.

Consider the following: VWO closed at its lowest ebb for 2011 on each of the two trading days that followed the Libya uprising; it’s down a mere -0.7% since the Friday before the Libya rebellion (Feb 18). On the other hand, SPY has shed -2.5% since Friday, February 18.

Could a pullback of -7.4% in VWO - one that began on January 12 and may have culminated on February 23 - represent an end to the near-term disenchantment? Similarly, are gurus betting a bit too heavily on the resilience of developed world large caps in SPY?

It’s too early to tell.

Nevertheless, it’s not too early to contemplate a contrarian viewpoint. Perhaps emerging market stock assets will be the better choice over the next six months.

Here’s some food for investor thought: Citizens of emerging regions spend a larger percentage of their disposable income on food and energy than the citizens of industrialized regions do. Yet, the monstrous spikes in the prices of food and energy over the last week haven’t had the stock market impact that many had anticipated.

5-Day Rolling Returns For Major Regional ETFs
Approx %
SPDR S&P Emerging Europe (GUR) 3.8%
SPDR S&P Emerging Asia Pacific (GMF) 2.4%
iShares S&P Latin America 40 (ILF) 1.9%
iShares MSCI European Monetary Union (EZU) 1.4%
iShares S&P Europe 350 (IEV) 1.4%
S&P 500 SPDR Trust (SPY) 0.1%

Once again, it’s way too early to suggest that emergers are on the mend. Likewise, if oil prices settle into a trading range, expect U.S. stocks to seek out multi-year highs, rather than “correct.”

With that said, you could trim your emerging market holdings. Just don’t abandon them. One look at India’s potential upswing (e.g., higher lows, encouraging economic data, etc.) should give you the confidence to pack a contrarian’s lunch.

Click to enlarge

India On The Mend

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Source: Emerging Region ETFs Have Recovered More Ground Than Developed World ETFs