Investors are currently getting a nasty reminder that ‘emerging’ and ‘frontier’ markets have a risky reputation for a reason.
Nigeria has just suspended its popular, reformist central bank boss. It seems he’s been a little bit too candid about corruption in the country’s all-important oil industry. The move shocked investors, who saw him as a safe pair of hands and a source of credibility for the country.
Ukraine meanwhile is dangerously close to civil war. Turkey continues to suffer from political upheaval.
Elsewhere, currencies have slid, politics are being scrutinised more closely, and investors have generally decided they’d rather keep their money at home.
Of course, when everyone else decides they hate a market, that’s when contrarian investors prick up their ears.
So is this a buying opportunity?
There’s no reward for being a contrarian fund manager
I’ve never met a fund manager who wasn’t a contrarian.
Regardless of what their top ten holdings are, they all like to paint themselves as having a touch of the maverick — not afraid to go against the grain, and make bold calls in the face of opposition and even ridicule from their more timid peers.
Yet, for an industry stuffed full of radical free-thinkers, they all seem to jump on the same trades with remarkable consistency. Funny that.
The reality, of course, is that very few managers genuinely want to stand out from the crowd. It’s called ‘career risk’. Managers who make truly bold calls, and get it wrong, will rapidly lose clients and then their jobs, in that order.
Even a decent — or even stellar — track record doesn’t help much. It doesn’t take a long period of underperformance before you start seeing carping headlines about once-respected managers being behind the times, or overly wedded to a style or viewpoint.
So there’s really not a lot of benefit to sticking your neck out in the money management business.
That’s why I like to watch what fund managers as a group are thinking. Very few of them want to stand out from their peers. So when you start to see them all crowding one way or another, it’s often a good indication that you should be thinking about going in the opposite direction.
Take a look at the latest Merrill Lynch Bank of America fund manager survey. According to this, global fund managers are gloomier about emerging markets than they’ve ever been. Meanwhile, a record percentage are bullish on Europe for the year ahead.
This is classic. Much as I like eurozone stocks, some of the peripheral markets have practically doubled in the last 18 months. But it’s only now that everyone is turning bullish on them.
Meanwhile, on the emerging-market front, the MSCI Emerging Markets index hasn’t been this cheap compared to developed markets since October 2008. But no one’s interested.
One of the basic rules of investing is ‘buy low, sell high’. Yet even the professionals seem to have difficulty abiding by this one.
This is probably the biggest advantage that we have as private investors over the experts. No one but you scrutinises your investment performance. So if you see an investment opportunity — even if you’re a little early in the day — you can take it, and wait for it to pay off.
Emerging markets might fall further — but they’re already cheap
This point about timing is relevant. Despite the poor sentiment towards them, I’m not convinced this is the bottom for emerging markets.
I’m basing that on little more than gut feeling — it doesn’t quite ‘feel’ as if they’re hated enough, or that the news flow has been quite hyperbolic enough. I haven’t yet read any articles that say, ‘That’s it — these things are never going up again’.
But the point is, you don’t have to get the timing exactly right. As long as the markets are cheap enough, then in the long run, they’re likely to bounce back. Assuming you’re not retiring imminently, you can start drip-feeding money in (if you haven’t already) and be patient.
John Stepek,
Contributing Editor, Money Morning
Ed note: The above article was originally published in MoneyWeek.
