The market’s New Year’s hangover just keeps getting worse and worse. Global investors finished 2015 in a nervous mood, and a spate of bad news out of China has exacerbated their jumpiness. Every time the Chinese government decides to weaken the yuan, investors interpret the move as an admission that the Chinese economy is weak and needs support. And, if the number of stories about how China is doomed to tip over into a recession (or collapse completely) is a true reflection of what people want to read, investors are far beyond nervous.

Skepticism and wariness seem to be the flavors of the week for many investors, and that’s part of a longer-term trend that extends far beyond the stock market.

The U.S economy is actually doing quite well—unemployment low, job creation high, poverty down—but that’s not how it feels to many citizens. Wage growth has been flat and the middle class has experienced more than a decade of diminished purchasing power. Investors are now officially more bearish than bullish, and that’s a reflection of how consumers are feeling.

China’s dilemma about how to maintain (or regain) growth is as sharp as ever. Steps like weakening the yuan may help the country’s export sector, but will tick off countries that compete with China in global commerce. And any weakening of the yuan also carries the threat of capital flight as investors in Chinese companies feel the threat of losing money on currency declines.

We made a major adjustment to our portfolio in last week’s Update, and that has helped us keep calmer this week. Chinese ADRs have corrected to the point of being oversold, but that means almost nothing until investors start buying again. We’re content to hold our cash, and raise more if necessary to keep losses small.

The more hopeful observation right now is the significant, much longer-term correction in many emerging market ADRs. There are stocks out there like Companhia Vale do Rio Doce (VALE), for example, that have been correcting for two years. In Vale’s case, that’s been courtesy of a bear market in commodities, much of it attributable to China’s reduced appetite for iron ore. But whatever the reason, Vale has traded down from 13 in July 2014 to just above 2 today.

With China still off its feed, there’s not much likelihood that Vale will be snapping back soon. But it’s important to keep in mind the potential for big rallies when China (or Europe or India or Brazil) gets healthy again. Whether that takes weeks, months or years, our market-following timing indicators will tell us when it’s safe to get back in the water long before the average investor gets the message.

Corrections aren’t pleasant, although holding lots of cash can render them much more tolerable. But taking the long view makes it clear that opportunity hides in the darkest situations. We’ll get through this. And we’ll find the pick of the bargains once the sun comes out again.

This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

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