by Tim Seymour
That is the statement I heard from a wise man today. So simple, yet the torrent of sentimental rain upon emerging markets for the last few weeks has seemed as if casual observers are throwing in the towel. And that folks, is exactly what they are, casual observers. You don't throw away markets that represent 80% of the world's population for obvious reasons, but you also don't suddenly jump out when the markets are at their lows.
I've seen many folks have their spirit broken by the relentless selling of EM that follows a long slow burn. I have worked with guys who have simply quit. I say quitting is not only a sad thing to do, but it doesn't make sense in the context of making a blanket assessment of 18 countries. Anyone who has any experience in EM (just a little) will tell you the current cycle is not unlike 10 others they have seen in the last 5 years, and far from the pain we dealt with in '94, '97-98, and '07-'08.
EM corrects. That is what is does when the global macro is queasy, especially when interest rates are feared heading higher, or global growth is in question. We have both themes as a backdrop. The fall in the MSCI EM (NYSEARCA:EEM) of around 13% since October is actually one of the smallest drawdowns of the last 5 years when weighing volatility. It also has transpired over 4 months, which mean the velocity (except for last week) has been relatively light (See chart).
I was managing a long/short EM equity fund during that time where the objective was to lower volatility, and large drawdowns were simply not tolerated. While the last couple of weeks have been intense for EM, they are nothing like August and September of 2011 for example.
The fact that all of this has come during a period where the Fed is unwinding the greatest financial experiment of all time, and while global growth is far from certain, leads me to conclude that the reaction of markets has been about right and maybe even somewhat calmer than it could have been. This statement comes despite the fact that the fund flows continue to send a message of panic overreaction by investors.
While I believe you can trade this current small bounce in the EEM (discussed last night on FM how I sold covered calls at $40), the level of support we are hovering near on the EEM goes back to Feb. 2010, only being busted by the U.S. downgrade and Euro default prospects of the Aug 2011. There is nothing going on in Turkey, Brazil, Argentina, Venezuela, and Thailand combined that can take us to 2011 sentiment right now, and fundamentals are in a VERY upgraded position from that point.
Look, I'm flattered by the attention the asset class is getting right now. It's rare we have been the global focus "we" are now. I also get a little frustrated with people talking about the doom and gloom when in fact all that is being discussed has been playing out for the last 18 months (see ZAR, BRL, current account issues, Turkey politics etc). And for the record, Argentina and Venezuela (with all due respect-- and there is tons of it-- for their culture, people and potential of their economies) have been the slowest economic train wrecks in history. Please don't bring up Argentina and Venezuela when discussing why U.S. growth is stagnating and labor market choppiness will derail the economy.
Take this opportunity to look at the extreme positioning and make "safe neighborhood" calls on a country level with a stomach for potential volatility and the wisdom of reviewing earnings multiples. Buy some of the great companies in EM who have proven through crises after crises that they are street fighters and survivors with world class franchises.
Disclosure: No positions