Trader’s Narrative

While this past decade was rather unkind to developed stock markets around the world, emerging markets and especially BRIC (Brazil, Russia, India and China) were huge winners:

Source: Bloomberg

There is a caveat to the chart, as mesmerizing as it is. The time axis begins in late 2001 - when Goldman Sachs’ Jim O’Neill coined the term BRIC and predicted that their growth would overtake developed countries. By that time, stock markets had almost finished the decline which began in 2000 and escalated with the September 11 WTC attacks.

But even so, when we took a not so random walk through the world stock markets in May of last year, as stock markets had begun their rebound, it was obvious that emerging markets had much higher relative strength.

This is a secular trend that will continue for some time because BRIC economies are largely commodity based. Right now we are smack dab in the middle of the 18 year long cycle which alternates between equities and commodities. And in case you hadn’t already noticed, we are in the cycle which favors raw materials (and hurts equities).

So emerging markets which rely on the extraction and sale of natural resources are a great place to “hide out” during a prolonged bear market. That is assuming that you want to be long equities as an investor. Last year, US retail mutual fund investors showed a surprising amount of shrewdness as they added $80 billion to their emerging equities exposure even as they were selling their US equity mutual funds. And if you want to be a trader, you can easily trade the volatile market, even as it remains range bound in the medium to long term.