Emerging Markets Definitely Due for a Pullback

By Jim Wiandt

The only asset class that's been more primed up than real estate for a pullback is international equities, and emerging markets in particular, so that analysis from Index Universe's resident whiz kid Murray Coleman doesn't seem like too much of a stretch.

My ideal gauge for emerging markets volatility would be Argentina (where IS that iShare - or better ProShare?), but we'll settle for the Brazil iShare (EWZ) as a near proxy. That fund, incidentally, has $7.5 billion in assets (or did as of the end of February according to www.indexuniverse.com/data). A quick check to www.iShares.com puts the number at just over $7 billion to date.

And why all that money? How about a 5 year annualized return of (drum roll): 65.15%!

It has really been a bit of an Emerging Markets Super Cycle, because my memory tells me (and the data will more or less back it up) that with Emerging Markets, it's usually 2 or 3 years (way) up and 2 or 3 years (way) down. And in Brazil at least, we've been WAY up since 2003.

Here's how it looks:

2008 (3 month return to 3/26): -8.29 (down 10.43% in the last month)

2007: 76.60

2006: 44.27

2005: 52.46

2004: 34.16

2003: 113.03

2002: (34.70)

2001: (19.52)

So yeah, MAYBE that fund and the asset class is due for a bit of a pullback. The trick is always the "when" part. I thought it might be LAST year, and look at that 76.60 number up there. So again, I'd make sure at least that the EM allocation of your portfolio was properly rebalanced.

Frankly, we went from a situation where EVERYTHING was going up to where NOTHING is looking very good right now. But the bottom will come, and real estate and financials seem to me like the interesting opportunities for the market timers of the world. EM is a long way behind them. But hey, what do I know about market direction? I'm an index investor.

Comments

[NoWorry:]

Headline: "DEFINITELY DUE...."

Summation: "But hey, what do I know...?"

Conclusion: If you have a mind, sir, make it up!

2008 Mar 26 04:27 AM

[User 168325:]

How much insight is required to suggest "it has been going up so it must be coming down soon". A 10 year old could present this kind of logic!!

2008 Mar 26 10:08 AM

[stollef:]

A bit moronic. Stick to your day job, friend.

2008 Mar 26 11:28 AM

[Cicero:]

Make up your mind?

A ten year old could suggest this kind of logic?

Moronic?

Looking at the simple big picture (EM's tend to crash big time periodically) is nothing if not part of smart investing. The first three posters are probably still trying to recoup their losses from the dot.com and real estate bubbles because they didn't have a moronic ten year old to help them rebalance their portfolio when the bubbles got too big. We all know that the market can stay irrational far longer than we can stay solvent, but the idea of this forum is to keep scanning the horizon for as many factors as possible to consider in making decisions. Good job Jim, don't let the negative comments get to ya'!

2008 Mar 26 11:50 AM

[Penhead:]

Yes, moronic is an understatement. . .

Clumping all international ETF's together and comparing results is simply that. . .moronic. Picking out the Brazilain ETF simply b/c it hasn't fallen, yet is even more pathetic.

Main component of EWZ. . .energy.

His statement "the asset class is due for a bit of a pullback. The trick is always the "when" part. I thought it might be LAST year, and look at that 76.60 number up there."

HMMMMM, if he expected energy (Petrobras in particular) to fall then yes. If he simply assumed the fund should correct "because" as he claims then the Whiz Kid is little more than a small pisser.

What a horrible blog post. Little insight, little information, and piss poor assumptions. Moronic is an apt description.

2008 Mar 26 12:24 PM

[m1lamb:]

The internet once again proves to be a conduit for someone that knows nothing see their thoughts in print...and no, I didn't lose my shorts in either the dot.com bubble or the real estate market. EWZ concentrates in sectors that continue to rise with an ever increasing demand, at least for the next 10 yeas. The attitude of traders may bring small corrections but to say that that sector will see the same kind of pullback as the real estate market is moronic simply because the two markets share NOTHING in common. Oh look, it is handy to use caps in making a point...

2008 Mar 26 01:00 PM