The Investment U e-Letter: Issue # 412
Tuesday, February 15, 2005 Emerging Market Stocks: It's Time to Buy
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
For the last decade or so, emerging market stocks have just plain stunk… If you'd invested at the highs of the main emerging markets index in late 1994, you'd still be down today, as the chart on this page shows. However, times are changing. An uptrend is in place once again. And many emerging market stocks are breaking out to new highs. If you're looking for the next trend to climb on board, emerging market stocks look like a decent bet… The trend is up, stocks (while not super cheap) are not expensive, and most importantly, piles of money are chasing too few opportunities - a recipe for higher prices. Let me explain… Emerging Market Stocks - Down for the Last Decade… Until Now 
MSCI Emerging Markets Index, source: http://www.mscidata.com In January, 75% of the new money in mutual funds went to international funds, the Wall Street Journal reported today. This continues a recent trend that we saw through much of 2004. The Investment Company Institute (http://www.ici.org) reported that, of the $10 billion that flowed into stock funds in December, $7.9 billion went to international funds. It's All About the Money Flow… In short, money is flowing into stock mutual funds. But investors are using it to invest in international stock markets instead of the U.S. I remember the heyday of international investing. I was a broker at the time, and people didn't even care what they were buying. It peaked in early 1994. Consider these figures of net new money into world equity funds (from http://www.ici.org)… As an example, in 1993-1994 more than $80 billion of net new money flowed into world stock mutual funds. It was a time where you could throw a dart at an international stock and make a triple-digit gain. And then it peaked. By 2001-2002 we hit the other side of things. Even though the size of the mutual fund industry had grown enormously, money flowed out of world stock mutual funds. Over $20 billion net flowed out of world stock funds in 2001 alone (where $50 billion-plus net flowed into U.S. stock mutual funds). And that was the bottom. Now the money flow is coming back. Fortunately, if you're considering getting in now, it's been a slow rise. The money flows aren't even near the 1993-1994 levels yet. And even better, the supply of decent emerging market stocks is just a shadow of what it was a decade ago. Argentina is a fantastic example of what I'm talking about… Investors' Love/Hate Relationship With Buenos Aires Back in the mid-1990s, average daily volume on the Buenos Aires Stock Exchange was about $50 billion dollars traded per day (that's billion with a "b"). And back then you had major companies trading… companies like oil giant YPF and massive telecom and energy companies. You wouldn't believe how far it's fallen. A year ago, trading on the stock market was often around $20 million dollars a day (that's million with an "m"). All the stocks traded all day didn't amount to a few seconds' trading of Microsoft or Intel. One reason is that all the big stocks in Argentina are now gone… They were generally taken over. A year ago, Argentina was left for dead. And that's when I started going down there. I've probably been there six times in the last year. Argentine stocks are now back! I saw my friend from Argentina real estate conglomerate IRSA (NYSE symbol: IRS) at the Money Show this month. IRS is one of the companies I was visiting. Gerardo correctly pointed out to me that trading volumes have really picked up in 2005, and institutional investors call daily looking to learn more. Shares of IRS are up 100% in the last six months! The boom is on. You missed the beginning of it. But I've experienced a few emerging market stock booms in my time, and they definitely can run higher than anyone can imagine. They're worth being along for the ride. But there could be another 75% on the table in emerging markets. Get in, but make sure you use a trailing stop in case the things bust. Good investing, Steve Related Articles Investment U Archives
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