Today’s comment is by Eric Roseman, Investment Director for The Sovereign Society and editor of The Sovereign Society’s Investment Trading Service, Commodity Trend Alert.
Dear A-Letter Reader:
Since May 9, the correction in global stock markets has been nothing short of spectacular for many bourses, especially the emerging markets. Since peaking in May, the MSCI Emerging Markets Index has plunged 25%. The riskiest assets, including some of the best-performing securities have also been the hardest hit investments since May with the emerging markets and natural resource stocks slammed the hardest.
Amid a severe sell-off for stocks and commodities over the last two months, some of the best buying opportunities have started to emerge since the bear market low of October 2002. Though the selling climax has yet to peak this summer, the best buying opportunities in almost four years are rapidly approaching ahead of the fourth quarter.
Triggered by a double-blow of rising short-term interest rates across the world and higher inflation in many countries, central banks are now slowly siphoning liquidity out of the financial markets to slow growth and quash the inflation threat.
Also, The Bank of Japan, a key provider of global liquidity and risk-based speculative trades vis-à-vis its super-low interest rate policy since 2002, is now on the verge of raising interest rates this summer for the first time since 1989. The threat of higher short-term interest rates in Japan has led to a massive unwinding of the “carry-trade,” a hedge fund strategy whereby investors borrow in low-yielding yen interest rates and reinvest the proceeds into high-yielding assets like emerging market stocks and commodities. That game is now over.
For value-based investors, some bourses are now trading at or near their 52-week lows and at very attractive multiples.
For example, Eastern Europe, the best-performing region since 1999, is finally looking attractive again for prospective investors after a torrid rally. The largest stock-market in the region, Poland, has plunged 19% since May 11, trading at 13 times trailing earnings and yielding 3.6%. Hungary, another large bourse and victimized by rising trade deficits in 2006, has crashed 26% over the last six weeks and now trades at just 12.6 times trailing earnings and yields 3.3%. And the Czech Republic, hammered since February and down 17% off its high, now trades at 18.6 times trailing earnings and yields a fat 5%.
Eastern Europe remains an exciting market for the remainder of this decade because of its low labor costs and ultra-low tax rates compared to Western European markets. A major theme throughout the region is banking consolidation as many Western European financial services giants vie for a slice of the banking pie. Also, a wave of Western European companies continue to transfer manufacturing operations to Eastern and Central Europe where wages are a fraction compared to those across the Rhine.
In addition to Eastern Europe, Asian markets have also been taken to the cleaners since May.
The MSCI Pacific Index, including Japan, has corrected 17% since May 9. The most resilient of all bourses in the region since May is Shanghai, down just 5.5%. Shanghai is actually the only regional bourse with a profit, up over 27% in 2006. But many other regional bourses are starting to look very attractive again this summer following reckless selling. These include Hong Kong (-10%), Indonesia (-17%), Japan (-17%), the Philippines (-20%), Singapore (-12.5%), Thailand (-18%) and Taiwan, down 15% from its 52-week high.
As we approach the nadir of this much-needed correction for global stocks, another great buying opportunity looms later this year for some markets. The world economy continues to boom in many regions. Rising interest rates in the United States, Europe and Japan will not precipitate a bear market in 2006 because wage growth in all major regions of the world remains benign, consumer prices are not surging and money-supply growth is still very buoyant. Also, the U.S. economy is already slowing, putting a cap on future Federal Reserve rate hikes.
The adjustment we’ve witnessed in asset prices is normal and a healthy correction in the context of a bull market for stocks since 2006. To be sure, the “easy money” for stocks is now behind us. But pockets of high-value have started to emerge in June and investors should position themselves for another rally as we approach seasonal market strength later in November.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society
EDITOR’S NOTE: Eric Roseman may be coming to a city near you! Eric will be speaking at The Sovereign Society’s Freedom Forums in Chicago on July 14 and in Toronto on July 15. Click here for more information.