The Ho-Hum Season? Not Likely.
Banking of Colombia
September 30 was the end of the third quarter, and when the quarter clock ticks over, I like to take a look at how markets around the world have performed. You know, see whether "my guys" (emerging market stocks) beat the developed world or got crushed like one of those toy cars under the feet of Godzilla.
I get my data from the MSCI/Barra website, which will (if you know where to look) give you access to the performance of every developed, emerging or frontier stock market index in the world for any period from the previous day to 10 years. You can do all kinds of sorting, but I just take the dollar-denominated price returns because that's the currency I invest in.
So, not to keep you in suspense, how have the emerging markets done against those of the developed world so far this year? Well, the percentage results read more like a baseball score than a football score, which isn't what we hope for. The score is: MSCI Emerging Markets 11.8% (year-to-date as of October 29) vs. the MSCI World Index at 4.6%. Round it off, and it's EM 12, World 5. And just for purposes of contrast, the MSCI USA Index booked a 6.4% gain for the same period.
Those are good results. They're not quite up to the level that will produce shouts of joy from the investing world, but the recent rally has done everyone a lot of good. And there's a lot of meaning to unpack from those numbers.
That's because global developed markets, until they began rallying in September, were actually down for the year. Even after a 9.1% gain in September, the MSCI World Index was up just 0.9% for the year. The developed markets continued to strengthen in October, with the World Index gaining 3.7%, bringing the Index's gain for the year up to the 4.6% mark.
The emerging markets universe had an even stronger September, as the MSCI Emerging Markets Index tacked on 10.9%. Add to that the Index's slight cool-off to a 2.8% gain in October and you get the emerging world's 11.8% jump year to date.
It's not really a surprise that emerging market stocks are kicking sand in the face of the developed world's equities. With China and India doing the heavy lifting, the engines of growth are just stronger there.
Plus, emerging markets are less susceptible than developed markets to debt crises; they don't have big enough budgets to get into that kind of trouble.
So consider the contrast here: Greece (-35.1% Y.T.D.), Ireland (-23.0%) and Spain (-13.5%) are all enormous drags on developed-market performance and 10 of the 24 developed markets were still in the red at the end of October. In the emerging universe, only the Czech Republic (-3.9%) is under water for the year.
On the upside, the top performing developed countries for the year thus far are Denmark (+25.4%) and Sweden (+22.8%), and the only other countries in double digits are Hong Kong (+17.1%) and Singapore (+15.1%), both of which are benefiting from their proximity to China.
In the emerging markets, 14 of the 22 countries in the MSCI Index have registered double-digit gains for the year, led by Colombia (+57.9%), Peru (+49.2) and Thailand (+45.2%).
The BRIC countries (Brazil, Russia, India and China) are the largest of the emerging markets, and they have shown widely varying results. India has booked a robust 18.8% gain for the year to date, with China and Russia each up 5.6%. Brazil trails the group with a 2.4% gain.
What conclusions do I draw from all these numbers? Well, only the usual things I've been saying for years. First, the emerging markets are stronger than the developed markets right now. That's not a surprise. It will also be no surprise when markets correct and emerging markets fall farther than developed markets. There is no gain without risk, and the higher the potential gain, the higher the risk.
Second, the larger economies within both the emerging markets and developed markets show lower volatility than smaller ones. Denmark and Greece are the top and bottom performers of the developed markets, while Colombia and the Czech Republic are the top and bottom performers of the emerging world. The larger, more stable economies trend closer to the mean, which makes them appropriate for investors who want to keep their risk level under control.
The moral of the stats is that anyone who is managing their own money-anything from shifting the allocations of your 401(k) to buying and selling your own individual stocks-should consider having some emerging market exposure. Not getting some emerging markets into your portfolio means you're missing out on higher returns.
If it's the higher downside risk that's keeping you from jumping into the emerging end of the pool, you might consider a subscription to the Cabot China & Emerging Markets Report (which I edit). I work hard to get my subscribers into the best stocks when markets are going up and get them into cash when markets are going down. You can have the experience and resources of Cabot China & Emerging Markets Report on your side with a subscription.
The calendar can be cruel once October rolls over into November. For investors, the third-quarter earnings reporting season is winding down, with mainly smaller and non-U.S. firms left to hand out the good/bad news. For house decorators, costume enthusiasts and sugar junkies, Halloween 2010 is history. For baseball fans, the World Series is over. For those with an enthusiasm for politics, the mid-term election is done except for the raucousness of victory and the squeaking of defeat. Even the March to Restore Sanity and/or Fear is safely consigned to the museum of memory (YouTube). It's almost enough to make a person worry that life is going to turn boring.
We will be rescued from terminal ennui by the approach of The Holiday Season, which is the name most people seem to prefer to The Shopping Season.
That means a tripling of the volume of catalogs hitting your mailbox, the onslaught of big-budget movies (including at least one that's "Perfect for the Whole Family!") and a deluge of on-air and on-line ads like nothing you've experienced before.
It used to be that the "official"ˇ holiday season didn't kick into high gear until after the table had been cleared from Thanksgiving dinner.
But now that the day after Thanksgiving has the highest retail numbers of the whole year, merchandisers can't afford to wait.
For me, since following the stock market is something I do every hour of every working day, the success of Black Friday (the after-Thanksgiving day when retailers hope their books go into the black for the year) is just a sideshow.
Life can't be boring when the markets are always working to take your money.
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My stock idea for today is based on the incredible performance of Colombia, the leading emerging market of the past year. Colombia is enjoying the benefits of kicking out the drug lords and getting back to the business of economic growth.
One of the companies that's enjoying the experience is Bancolombia (CIB), the largest bank in the country. This is no flash-in-the-pan company. Earnings growth has been steady, with gains of 39%, 45%, 31% and 24% in the last four quarters and the company's after-tax profit margin reached 20.8% in Q3.
The chart for CIB shows a stock that rose strongly in 2009, then put in a five-month base that lasted through May 2010. When the blastoff came in June, the stock raced from 44 on June 1 to 62 in late July. Two bases"‰three weeks at 64 in September and five weeks at 66 starting on September 28"‰have set the stock up for further advances.
CIB isn't going to be a rocket shot. The company pays a 2% dividend and works better as a long-term holding than a trading vehicle. But CIB is a great base holding to underpin the higher volatility picks in your portfolio while providing a little income.
Learn more about Bancolombia and other top emerging markets stocks in Cabot China & Emerging Markets Report.
For Cabot Wealth Advisory