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Actionable Ideas, Emerging Economies


Good tradable rally could happen in the near term.


Sometimes having the facts about the market environment in which investors operate can be very beneficial. In my podcast interview, conducted yesterday with Sam Stovall, Chief Investment Strategist at Standard and Poor's Equity Research, there were more than a few pertinent items that investors should consider.

Since 1945:

  • Fourth quarter of a US presidential year +3.5%
  • First year of new Democratic administration +14.2%
  • One-party rule +10.4%
  • November through April +7% (approx.)

Investment Strategy Implications

While history offers no guarantees on future results, the above data, along with my technical analysis work (recent across the board non-confirmation lows), suggest a good tradable rally is the higher probability for stocks over the near term.

Moreover, the high degree of investor pessimism and fear, along with the mountain of cash sitting on the sidelines ($3.3 trillion, approx. 40% of the S&P 500), is also supportive of higher equity prices. Lastly, there's the valuation argument led by none other than Warren Buffett. All together, it's hard to be overly bearish at current market levels.

Now, some actionable ideas: Because global growth in emerging economies will withstand (within reason) the significant slowdown in developed economies, I believe most emerging markets' prices look especially attractive at current levels. They're among the very best babies thrown out with the bathwater, courtesy of mutual and hedge funds' indiscriminate selling induced by forced liquidations.

Two names to consider:

EEM (Emerging Markets): Gives broad exposure to the category.

Click to enlarge.

EWZ (Brazil): Strong fundamentals, reduced exposure to US.

Click to enlarge.

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No positions in stocks mentioned.
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