This post was published on ZYX Emerging Markets ETF Alert.
A major opportunity in emerging markets may be ahead. However patience is needed as these markets need to fall a little bit more before buy signals are issued.
The concept is simple. For the very long-term, growth is in the emerging markets and not in the developed markets. It makes sense to accumulate emerging markets when they swoon because they invariably always go up.
The current swoon in emerging markets is triggered by the announcement by the Federal Reserve that it plans to start tapering QE. The impact is that funds have started flowing out of emerging markets and back into the United States. American’s are the biggest investors in the emerging markets. So as Americans repatriate dollars, they sell emerging market stocks and emerging market currencies. As a result, emerging markets are hit with a double whammy. TheIr currencies weaken and their stock markets fall.
Reversal in fund flows is not a new phenomenon. It occurs periodically, the reason is always different but the effect is always the same. The key is to time the purchases when the fund outflows are close to the maximum.
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Aggressive Investors Who Have Gone Short
Most investors simply buy from the long side as they want to benefit from the markets going up. However aggressive investors also trade from the short side to take advantage of markets going down. Those investors who went short upon our short-term downgrades to sell a number of emerging markets are now sitting on handsome profits in a very short time.
Here is an example. On March 22, 2013 we downgraded Thailand to Sell in the short-term. The chart shows a fall in the Thailand market since our downgrade.
On March 22, 2013 we wrote:
Conservative investors who invest only on the long side, may consider taking substantial profits on THD that have accrued since we upgraded Thailand to Buy in the long-term.
Aggressive investors may consider initiating a small short position and accumulating it on bounces. The ETF of choice is THD.
Since then, an investor going short would have realized a return of 13 – 15% over the four-month period. Investors who went short not only Thailand but other emerging markets based on our short-term downgrades may want to protect the profits either by realizing them or by using tight stops.