I believe he and I could look at the same sky and see different colors.
The article is particularly cautious about the Nasdaq BLDRs funds ADRE, ADRD, ADRU and ADRA. I own ADRE personally and for some clients.
It seems like for all of these papers he writes he uses three years of data which I think is way too short a time frame for the time of work he is doing.
I open myself up to criticism by saying I did not read all several thousand words
Geoff uses a table that note ADRE is 55% in one year and up an average of 46% per year for the last three years. That sounds like a lot but bubble like? I think not. Infospace went up by 5000% from it IPO in late 1998 through March 10, 2000. In the same time period CMGI went up over 1000%. ADRE has come just short of tripling in the last three years. Is that up a lot? Could it correct severely? Yes to both but those are not bubble numbers.
True bubbles do not occur so close together in time. People ask about a housing bubble. A nationwide price decline of 20%, which has never happened, would be far from the 75% the Nasdaq dropped.
A lot of Geoff's work in this paper notes that foreign/emerging has similar beta and R squared as the dot com/tech sector. To me this is looking at the sectors in a vacuum and ignores too many factors.
This chart compares Brazil to an Internet index (IIX). They may have the same beta and same R squared and some other academic stats but they each respond to demand for completely different things. Brazil is likely to do well for as long as the commodity boom lasts. When commodities turn down it makes sense to think that Brazil will then struggle.
I believe blending lowly correlated assets is very important and Geoff's piece seems to ignore the point. To take an extreme example, If, for the time period in the chart you put 50% in EWZ and 50% in this Internet index and did no other trade (so you are blending two investments with a very low correlation to each other) you would be up about 40% (see below for my math). In the same time frame the S&P 500 is down about 15%.
I think focusing on the volatility of the components misses the forest for the trees. The volatility of the portfolio makes much more sense to me.
My example is extreme and not a trade I would do but I think makes the point.
As for my math, the chart starts in July 2000. If you put $100,000 into each product back then you would have $30,000 in the IIX and $250,000 in EWZ today for a total of $280,000, which by rough math gets you to 40%.
I urge you to decide for yourself what makes sense.
7 comments:
International investing comes and goes, just like small cap value, large cap growth. Has this fellow ever heard of John Templeton?
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I really never understand where he is coming from
It's important to remember that the 50% or so annual returns we've seen in emerging markets in recent years come after an incredibly awful decade for these stocks. That pace may not continue forever, but it is perfectly natural after all those years of currency crises we saw in the 1990s. Of course there is risk, but emerging markets are just catching up for lost time and they remain reasonably valued.
It would probably be easy to find two sides to the argument as to whether emerging are farily valued or not. Even someone who thinks they are very expensive would need to concede that any expenseive asset class could become much more expensive before doing anything else.
A part of this discussion has to be that as an asset class a diversified portfolio needs some exposure. You may want a lot or a little and the amount you want may change but overtime you need to sell some down and buy some up.
Balance is the important thing to me.
Many emerging markets are very dependent on the US economy. The are linked to the US either by direct exports to the US, or by supplying china with raw materials for reexport to the US. It's not at all surprising that emerging markets would be tightly linked to the US economy.
When the US consumer is forced to stop shopping it will be gruesome for all the emerging market economies.
As I see it, right now US retail investors are bored with mainstream equity markets and so are pouring money into emerging markets, hard assets, clean energy and precious metals. Soon investors wil be bored, and move on to other sectors.
There is a lot of loose gambling money sloshing around. Most of that is few money which was not exposed to the 2000-2002 "correction"
I think that is one of the reasons that Nasdaq/First trust intorduced its equal weight ETFs. AUM for QQQQ has been flat for a while. QQQQ has lost some of its fizz and sparkle because tech and biotech aren't the new new thing. Hence QQEW to capture more "new growth" and QTEC for more technology exposure.
"A nationwide price decline of 20%, which has never happened, would be far from the 75% the Nasdaq dropped."
Yeah, but don't forget that people are typically heavily leveraged in their houses, to a much much greater extent than for stocks.
If your loan amortizes and you can afford your payment, how sensitive are you to moves in prices?
Over leveraging is dangerous regardless of what point we are in the cycle.
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