I’m developing a rebel impulse to oppose whatever popular opinion advises I should do.
I’m told to go, I stop.
I’m told to stop and watch me go. It’s not a strategy that serves me well on the M4 to Bristol but it can do wonders on the stock market.
This contrarian instinct protects investors during frothy bull-runs and it produces the biggest winners in the depths of the worst bear markets.
Why?
It’s to do with herd behaviour... investors are like sheep.
Grazing in fields and eating grass?
OK... investors are a bit like sheep. They often demonstrate a loss of individuality, doing what everyone else — the herd — does. It can lead to massive losses.
When a stock is flying high, the herd buys. Everyone piles into a stock and pushes the prices even higher. Before you know it, everyone is on the same side of a trade. When some unexpected bad news rocks the boat, everyone gets wet.
Sheepish investors are often regarded as the ‘dumb money’ in the market. They are the last to get into a good move and the last to sell out of a bad move.
It is crucial therefore to treat big scale publicly known success stories with a healthy dose of scepticism. It could save you a fortune:
- In 1987 western economic and business leaders were desperately trying to mimic Japanese economic and business practices. By 1991 the Japanese economy and stock market were in the middle of a painful and prolonged downturn.
- In 1999 the world’s investing public was wrapped up in ‘irrational exuberance’, buying unproven US tech stocks. By 2001US tech stocks had fallen hard and a deep bear market ensued.
- In 2004 hedge funds were being lauded as the future of investment. Well-heeled individuals were investing in their droves. By the end of 2007, hedge funds had recorded their worst performance on record and were generating a consistently negative return for investors.
You get the idea. Once a big investment idea becomes common knowledge, the opportunity has already passed.
So where should you be putting your money now?
Not Japan.
Not tech stocks.
And certainly not in hedge funds.
It is emerging markets that win the ‘big idea of the moment’ trophy.
Emerging markets are those nations previously dismissed as developing or third-world. These are countries that have rebuilt their economies along market-oriented lines and it has paid off big.
It has created big money opportunities in trade, technology and infrastructure. With their big populations, big resource bases and big markets they represent potentially really big profit opportunities!
But like so many big success stories before it...
Will emerging markets go wrong too?
Yes and no.
Yes because stock markets in the leading emerging markets — Brazil, Russia, India and China — are down 13.2% for the year. More specifically China (down 45% since the beginning of the year) and India (down 30% since the beginning of the year) are down on the year.
Brazil and Russia have both risen this year.
But history is repeating itself... just as the theme muscles its way into the public eye it is hampered by misfortune. But don’t for a second think that you should therefore turn your back on emerging markets.
This theme is no flash in the pan.
Stock markets in this group were expected to falter as the world financial system hit the skids. With big institutional investors from all over the world withdrawing their funds at the behest of fearful clients, a downturn was inevitable.
Particularly, ironically enough, the downturn hit those markets most favoured by the investment firms as these markets encountered the greatest sell-offs.
But stock market performance is only one part of the equation... especially for UK investors looking to join the party. The real magic lies in those nations’ economies.
Stock markets can rise and fall, but it is indisputable that an expanding proportion of world growth is made up by emerging markets.
By IMF estimates, the world will grow at an average of 4.6% between now and 2012.
Advanced economies account for only one third of this growth and no guesses for where the rest is coming from... emerging markets.
So have emerging markets decoupled?
Judging by AVEVA, Burberry and Cookson, as well as many other FTSE companies’ earnings, you’d say yes.
Decoupling is the idea that emerging markets have grown bigger and smarter to the point that they no longer depend on the Americans for growth. This theoretically leaves them relatively unaffected by a severe US slowdown.
These companies have managed to actually grow their profit margins at a time when the UK, the company they are listed it, dwindles. That is because they have significant operations with increasing customer bases in these emerging markets.
It’s a departure from conventional thinking... for emerging markets to grow while the US — the world’s largest economy, responsible for 25% of world spending — contracts is hard to imagine.
Nonetheless, the figures are unmistakable.
Since 2004 the US has slowed down. Even after stripping out the impact of inflation, emerging markets have sped up. In fact, emerging market growth was so rapid that the global growth rate was faster than at any time since the early 1970s.
Stock markets can fly even when the economy is suffering. Similarly, economies can do well even when the stock market is suffering.
This is what we are seeing in emerging markets, China and India boast fantastic economies but their markets are a volatile proposition.
And, not only is there weakness in these stock markets, actually buying stocks in the region can be uphill struggle.
What stocks do you buy?
Which broker will cover these stocks?
Where will I get my news and reports on these stocks?
It’s a lot of hard work and the return is not the sure thing it was three years ago.
Where does that leave us British investors?
There is a smart way to play the boom in emerging markets and it follows on from what I wrote about UK large caps on Monday.
British firms with exposure to emerging markets are right now the best bet for private investors.
You’ll be familiar with the company.
Your broker will give you access to them.
And, the papers are full of news and analysis on what they’re up to.
Most importantly, these companies could make you a packet!
I’m talking about the companies that saw the opportunity in emerging markets coming.
Companies that had been busily seeking out Asian, Eastern European and Latin American customers, business partners and buyout opportunities.
By identifying this trend these companies are on the front line of this new ‘economic miracle’
The growth potential for theses firms is massive.
In a depressing age where most companies have to cut costs, re-strategise and sell assets, finding stocks that are growing outright is no mean feat. But it is what we are here for.
The Fleet Street Letter is very excited about a new white paper the investment team is putting the finishing touches on.
Stay tuned for a special report that will give UK investors the safest way to play the boom in emerging markets.
Watch this space.
Theo Casey P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.
