‘What do you mean, the bank’s out of money?’
Was the screen of the cajero automático (ATM) lying to me?
It wasn’t a good start to the day.
This was my first morning in lively Buenos Aires, Argentina…
This happened six years ago. I was in South America on a three-month trip.
A few expenses on arrival meant I needed a few hundred US dollars immediately.
I assumed I could take out US dollars at a cash machine, or at least withdraw some Argentine pesos and change them without too much hassle.
You can imagine my confusion when I pushed my card into the closest ATM, asked for a nominal amount of Argentine pesos, and was met with this: ‘The amount you are requesting is over the extraction maximum.’
A scruffily-dressed man of late middle age, wearing a cream-coloured jacket and brown felt hat, strolled past the ATM. The old Argentine paused and chuckled at my predicament with a wry smile.
With a sympathetic look, the man said in stilted English: ‘No dollars! Bank out of money. Try arbolito.’
Arbolito?
I’m not sharing this story in order to attract sympathy about my holiday going pear-shaped.
I’m sharing this story with you to make a point about what’s stressing out the stock market right now…
Follow the Money
I solved my dollar problem the same way that many panicked foreigners solve it — via the black market.
Buenos Aires is full of arbolitos (street hawks selling dollars) shouting ‘change’ and quoting the illegal rate. I found them as much a part of daily life there as touts selling tango show tickets.
But my Argentine adventure had to unfold further before I discovered what had caused my predicament at the cash machine.
As I learned, Argentine banks have imposed limits for several years on the amount of money foreigners can withdraw. These limits are somewhat arbitrary and can vary from machine to machine, but the one common feature is this: they’re low. Less than fifty dollars a day low.
It’s a direct legacy of the turmoil that followed the country’s economic collapse in 2001.
When Argentina stopped making payments on $95 billion of debt, it restricted their ability to borrow outside the country. This starved Argentina of hard currency.
The daily ATM limit for foreigners that inconvenienced my trip was just one of the measures the government took to stem the outflow of capital.
These measures have had some effect, but even so, Gabriela Nudel, head economist at Fundacion Capital, a financial consulting firm in Buenos Aires says:
‘Argentina has seen a significant amount of money leaving the system over the last five years, some $80 billion.’
So you see, heavy capital inflows and outflows aren’t a new development for emerging markets.
If anything, they’ve been a fact of life for decades.
The real reason it’s newsworthy today is really quite simple…
The markets only worry about cross-border capital flows when there’s nothing else to shout about.
Sorry to seemingly trivialise the issue, but that’s just the way I see it. But there is an important aspect to this. Namely, how can you profit from the fears of other investors?
A Storm in a Teacup
It’s only been only a few days since the US Federal Reserve announced their intention to continue tapering off their quantitative easing experiment.
Since then, pundits around the world have barked about the ‘crisis’ in emerging markets and the catastrophic risks that capital flight has introduced to our global economy.
Earth to pundits: this isn’t news.
I repeat: the markets only worry about stuff like this when there’s nothing else to shout about.
Fears over capital flight from emerging markets are one part of the story here, but if you ask me, the more relevant factor for the Australian market is the Reserve Bank of Australia abandoning its easing bias in favour of higher rates to quell inflation.
That, and the fact that we’ve been in a slightly overbought bull market that deserved a little technical correction.
You see, markets can’t defy the laws of gravity forever. The bulls and the bears are constantly locked in a battle for supremacy.
Different views will be proven correct depending on the time period over which you judge them.
At Money Morning, we aim to help you generate long term wealth. If you want gains that can be judged over a period of weeks rather than years, then perhaps my old pal Brian Jagger’s ‘automated’ trading service is more your speed.
In any case, the steam coming out of the market right now seems to be telling us that investors are getting a little tired of the long-running, established dividend yield plays.
Not all Stocks are Expensive
Just look at the year-to-date performance of the standard-bearers of that trade, Australia’s big four banks.
So far in 2014, Westpac Banking Corp [ASX:WBC] is down 5%. Commonwealth Bank of Australia [ASX:CBA] is down 6%. National Australia Bank Ltd [ASX:NAB] is down 7%. And Australia and New Zealand Banking Group [ASX:ANZ] is down 9%.
With the prospect of a higher return from bank deposits, the relative attractiveness of ‘safe’ dividend yield plays decreases. That means investors dump their large-cap bank stocks.
Bad news for the stock market, right? Maybe not.
Fortunately, this cloud has a silver lining.
As share investors move out of dividend stocks, they have two options.
Go to cash, or top up on growth stocks.
If your risk appetite pushes you towards equities, as interest rates stay relatively low and large established dividend stocks cool off, 2014 should present many opportunities for small-cap growth stocks to outperform the broader market.
So if you’re looking for ideas of where to invest next, why not start in the sector that’s consistently beat the large-cap indices by an average of 6.7 percentage points per year?
The analysis I’m doing right now for Australian Small-Cap Investigator is all pointing to one outcome: 2014 looks set to be a bumper time for stock investors.
I’m not saying it’s risk-free, but despite the headlines in the mainstream press, I can assure you there is still plenty of value left in a certain corner of the Aussie stock market.
Cheers,
Tim Dohrmann
Small-Cap Analyst, Australian Small-Cap Investigator
