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More Emerging Markets are Joining 'Crash' List

Friday, August 14, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
More Emerging Markets are Joining "Crash" List as Overseas Pressures Build
Market Roundup
Dow +69.15 to 17,477.40
S&P +8.15 to 2,091.54
NASDAQ +14.68 to 5,048.24
10-YR Yield +0.01 to 2.196%
Gold -$1.30 to $1,113.90
Oil -$0.07 to $42.93

By Mike Larson

Let’s dispense with the pleasantries, euphemisms or jargon. More and more emerging market currencies, stock markets and ETFs are outright crashing.

Take the Global X MSCI Colombia 20 ETF (GXG). As the name suggests, it invests in the top banks, energy firms, electric utilities, and other companies in that South American nation. Do you know what its year-to-date return is? Minus 30%! In the last year, it has shed even more – 55% of its value.

As you can see in the following chart, it’s now trading for only a couple bucks more than it did during the depths of the financial crisis.

Or how about the iShares MSCI Malaysia ETF (EWM)? It just plunged for 10 straight trading days, losing almost 15% in the process. That puts it at its lowest level since late 2009.

081415_1533_MoreEmergin1.jpg

Meanwhile, the Malaysian ringgit currency just suffered its worst one-week plunge since the Asian financial crisis of 1997-1998. As a matter of fact, the currency is now worth the least since the depths of that regional economic collapse almost two decades ago.

Some pundits are tempted to just blame it on energy, and the energy sensitivity of those two economies. OK. Then how do they explain the 24%, one-year decline in the iShares MSCI Turkey ETF (TUR)? Or the one-year loss of 25% on the iShares MSCI South Korea Capped ETF (EWY)? And the 16% drop in the iShares MSCI Singapore ETF (EWS)?

While I’m at it, what about the 12% loss on the iShares MSCI New Zealand Capped ETF (ENZL)? The negative 20% move on the iShares MSCI Chile Capped ETF (ECH)? And how about the 25% plunge in the iShares MSCI Emerging Markets Eastern Europe ETF (ESR), which owns Russian, Polish, Hungarian, and Czech stocks?

You don’t exactly need to be Sherlock Holmes to see a pattern here. It’s not just oil-sensitive economies and markets that are falling sharply, and in some cases, crashing. That makes it clear my recent dabbling in a very limited foreign stock position or two was premature, and why I just exited and moved on.

The Malaysian currency suffered its worst one-week plunge since the Asian financial crisis of 1997-98.

The bigger question now, though, is: “What does this all mean for U.S. stocks?” Will all the capital flooding out of those foreign markets come here and prop our stocks forever? Or are we reaching the point where the sum total of all these corrections, bear markets, and outright crashes overseas is too much for the U.S. market to bear? Can we really continue to be an island of prosperity in an ocean of misery?

The market hasn’t rendered its ultimate verdict yet. But I’m a conservative guy by nature. I see all this stuff going on around the world … and the fact many U.S. investors are just ignoring it and going along their merry way … and I get worried.

So rather than just embrace that complacency, I’ve been actively taking protective steps against greater turmoil. We’ll see if it pays off. I figure that in the worst case, I give up some potential upside and can always buy back in later. And in a true crisis, I will succeed in protecting your capital like a junk yard dog – my ultimate, all-encompassing goal each and every day.

How about you? Do you think we can remain above the fray here in the U.S.? Are there foreign markets that particularly worry you? Or are you taking advantage of the overseas turmoil to buy select U.S. stocks at cheaper levels? What other moves have you been taking lately, if any, to adjust to the changing environment? Hit up the Money and Markets website and share your comments if you get a chance.

Our Readers Speak

What happens next to stocks? That was the primary focus of discussions over at the website, and for good reason.

Reader Norm X. weighed in with a bearish take on the latest action, saying: “According to the Flow of Funds data, ‘smart’ money has been increasingly selling stocks for well over a year. As of last month. even the ‘dumb’ money investors have been net sellers! So what is holding up stocks? Companies borrowing cheap money to buy back their own stocks. How long can that last?”

Reader Tony D. added the following on the interaction between junk bonds and equities: “Stocks in the energy sector are in a bear market, so if the junk bond market decline is related to the energy sector, then stocks have confirmed. As far as the broader market, we can only hope that ‘this time is different.’ And it may be, in light of international money flows.”

Reader Mike P. picked up on the energy-junk bond linkage too, and suggested it could ultimately spill over to the broader economy. His view: “The high yield bond market has been falling ever since oil crashed. There is a high possibility of defaults among oil related company bonds that, in some cases, make up a sizeable percent of the holdings of some high yield funds. JNK is one of them.

“Also the Chinese slowdown and the rising value of the dollar have caused commodities to crash, raising the possibility of defaults among emerging market sovereign debt as well as emerging market corporate bonds. IMHO, the high yield bond market is signaling a slowdown in emerging markets and the oil industry. If the slowdown is deep and long enough, eventually it will affect the U.S. economy.”

Finally, Reader Jack McM. said: “For background, I am 71, a retired bank president/CEO in Tampa, FL. I’ve been investing in the stock market since 1968.

“The yellow ‘market risk’ warning signs are blinking loudly. I am sitting on a bunch of cash, out of the stock market, and am not now willing to invest in equities/fixed incomes just yet! There will be a market correction; we just don’t know when/what magnitude.”

Thanks for sharing your comments. As I mentioned earlier, the junk bond market has been a great leading indicator of broader problems in stocks – even if many pundits want to peg the problems solely on energy this time around. It’s another reason why caution and prudent risk-paring looks like the best course of action to me.

Here’s the link again if you haven’t added your comments to the debate yet. Have at it.

Other Developments of the Day

BulletThe three biggest horses in the European economy appear to be tiring. Second-quarter GDP growth readings in Germany, France, and Italy all came in weaker than expected, dragging down growth in the 19-nation eurozone to just 0.3%.

BulletThe U.S. Embassy in Havana, Cuba has been open for business for a little while now. But today, everyone from Secretary of State John Kerry to the three U.S. Marines who lowered the flag from the embassy when it closed in 1961, celebrated its opening in a special ceremony. Career diplomat Jeffrey DeLaurentis will be the top U.S. representative there for now, since an official ambassador hasn’t been nominated and confirmed.

BulletCoca-Cola (KO) has a new CEO-in-waiting, after James Quincey was named president and COO. There’s no indication that current CEO Muhtar Kent will step down soon, but the move should ease investor concerns about succession plans.

BulletReady for another political blast from the past? Well, reports suggest former Vice President Al Gore may be sounding out supporters and strategists to see if he should (or could) run for the 2016 Democratic presidential nomination. It seems like an unlikely move, but you never know.

So what do you think about a possible Gore presidency? The latest disappointing news out of Europe? Or the historic re-opening of a U.S. diplomatic post that has been shuttered for more than 50 years? Weigh in over at the website on these or other stories when you have a minute here.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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