2013 hasn't been a kind year for emerging markets. While the stock market of most of the western world rallied ahead, the stock markets of emerging nations continued to wallow in mud with many countries still showing negative profits since the start of the year. The Brazilian stock market has incurred a shocking loss of 24.59% year to date while the rest of the BRIC nations (Russia, India & China) lost between 4-10% YTD. Even Singapore's STI, with its stable developed economy, irked out a pathetic 2.41% YTD return as compared to US (24%) and Europe (11%). Overall, emerging markets underperformed the US stock index by almost 15%, giving credence to my strategy to continue increasing the portfolio allocation towards the western world, and not taking too strong of consideration with the traditional investment formula of Growth = Profits, which doesn't seem to work too well as you probably has guessed by now.
Will Emerging Market Shine Towards the End of the Year?
This question has been burning inside my head for the longest time as I debate whether to throw in the towel and move the majority of the allocation into US and Europe, given that I have just been given a bitch slap by emerging market equities, for my continued (and diminishing) support for emerging market equities. For those who are familiar with the Singapore stock market action, you may have noticed a certain trend when the STI index rallies. Typically, the blue chips such as DBS, Singtel and Keppel Corp will start to move first, followed by mid-caps and the attention will be finally directed at the penny stocks after most of the value in the larger stocks has been exhausted. Typically, when the volume and action in the penny stock arena picks up, it will signal the end of a cycle whereby the market will either go into correction, whereby every stock will fall in value; or the stock rally continues, rotating the funds back to the blue chip stocks of the country again.
This kind of localized stock rotation action can be seen in the international fund arena too. Typically, the funds will flow to the bluest of the blue chip in the world, which mostly are listed in the US stock exchanges, followed by Europe and than the Emerging Market. What is happening now could be part of the fund rotation process and sooner or later, the Emerging Market will catch up in terms of returns at some point of time.
Another More Disturbing Theory
Another possible theory to explain the lack of performance of the emerging market is that there is a possibility that emerging market may be at a cusp of their own financial crisis. Emerging Markets has been taking on more debt to finance their growth, thanks to the cheap and easy money provided by the ailing western nations and the upcoming monetary tightening by the US central bank might expose these weakness and vulnerabilities when it is time to pay back the money. There has been arguments that the emerging markets have learn their lessons from the 1997 Asian currency crisis and we have sufficient safeguards from preventing such a disaster again. Than again, we do understand that emerging market government hasn't been the most transparent in terms of economic data and we never know what potential poison lurks below those beautiful economic data. The China credit crunch that occurred a couple of weeks ago may be an interesting case study of the potential fallout that may occur in the future.
Staying with Hope
I will be holding on to the first theory of market rotation, while keeping in mind the potential Asia's Doomsday scenario. However, as part of my risk management strategy, I may continue to reduce my allocation in Emerging Markets slowly throughout the months and pay more attention to the very neglected European Markets, which has been quietly making progress in the midst of anemic economic growth and high unemployment. My bet on Thailand and Turkey last month did not pay off as the stock market of these two markets swung between extreme optimism to pessimism. In one week, they can be up 5-10% and the next week, losing 5-10%, resulting in a no gain position. Since, I have only held on to them for 2 weeks, I will give them some more time, to justify their allocation in our portfolio.
I am sad to report that our benchmark MSCI World Index, has surpassed our portfolio due to the gross under performance of 4% for the month, thanks to our allocation in Emerging Markets Equities and Singapore Government bonds. However, we will be able to pick up some lost ground if Emerging Market Equities start to run later in the year. On the bright side, the portfolio performed much better than the Singapore Stock Market, thanks to our allocation to US equities.
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