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The News Is Always Worst At The Bottom

Summary There is an old saying on Wall Street that I will paraphrase as: The news is always best at the top and worst at the bottom. This axiom is more of an observation of investor behavior rather than an actionable trigger for calling tops and bottoms. I am reminded of this logic when I look at the situation in emerging market countries, and even more so with Brazil. There is an old saying on Wall Street that I will paraphrase as: The news is always best at the top and worst at the bottom . That is because good news drives buyers in and bad news generally causes widespread selling and/or panic as sentiment reaches extremes. Once all of the bandwagon investors have either jumped on or stepped off a trend, the price begins to reverse course. This axiom is more of an observation of investor behavior rather than an actionable trigger for calling tops and bottoms. However, I am reminded of this logic when I look at the situation in emerging market countries, and even more so with Brazil. Last night, Standard & Poor’s downgraded Brazil’s credit rating to junk status in a move that is shocking to no one that has looked at a chart of the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ). This ETF tracks a diversified basket of large- and mid-cap stocks domiciled in Brazil, and has fallen more than 50% over the last year. In fact, EWZ has been in a long-term downtrend since it peaked back in 2011. Some of the more recent and ferocious selling in Brazil may be prompted by issues stemming from the rout in Chinese stocks alongside other lesser-known emerging market countries. The broad-based iShares MSCI Emerging Market ETF (NYSEARCA: EEM ) fell 30% from its April 2015 peak to the August low. In addition, this ETF is trailing only the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) in net year-to-date outflows , with over $7.2 billion in investor redemptions. Yet, despite the continued deluge of negative headlines concerning these overseas markets, we are actually seeing some constructive price action over the last several weeks. EEM has managed to establish one higher low in September and shake off the latest round of Brazil downgrades. In addition, the sideways action in the U.S. dollar index may embolden some investors look for value overseas. Whether you are a bull or a bear on emerging market indexes, this is certainly an area that is worth monitoring through the remainder of 2015. There will likely be profitable opportunities for both sides moving forward. The Bottom Line I have no idea if this moment will mark THE low in emerging markets or if it is simply a brief respite in the path to further selling. Bad news can always get worse. If there is one thing I have learned over the years, it’s that the markets can stay irrational for much longer than you can stay solvent . Nevertheless, keep in mind that some of the worst news headlines have actually sparked some of the biggest inflection points over the history of investing. That is why it pays to be flexible and maintain a counterintuitive mindset when others are fearful . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

India Small-Cap ETFs: Best Of Emerging Markets Now?

After witnessing two months of lull, the Indian stock market finally belied cynics in July as it easily combated global issues like the bursting of the Chinese stock market bubble, nagging Greek debt deal negotiations, looming Fed rate hike and the strength in the greenback. Investors also rushed to capitalize on this grit and poured Rs. 5,300 crore (net) in Indian equities last month. Reduced worries over monsoon deficiency, a timely correction in the stock market and rising domestic investment led the key Indian bourse to bounce back from late June. Earlier, investors were unnerved by apprehensions of lower rains this monsoon which would take a toll on the all-important agricultural sector and push up inflation. The fear was not baseless either as RBI cut India’s growth forecast for fiscal 2015-16 from 7.8% to 7.6%. However, contrary to this apprehension, rain deficiency has not been as severe as predicted. The Indian market surged over 30% last year. While most of the gains were wiped out this year on Fed rate hike concerns and a spate of downbeat economic indicators including weak corporate earnings and political gridlock causing hindrance in intended reforms, the correction opened the door to further expansion. This was truer given the extremely muted levels of energy and gold prices. This was because India imports more than 75% of its oil requirements and accounts for about 25% of the global gold demand. This makes the country highly susceptible to these commodities’ prices. India’s foreign-exchange reserves are close to a staggering $355 billion, which gives the economy the power to fight the expected volatility post Fed tightening, per Bloomberg . Unlike taper tantrums in 2013, Indian rupee remains largely stable and shed only 0.6% in the last one month (as of August 5, 2015) relative to the U.S. dollar. In fact, the uproar in global markets, mainly in Greece and China, brightened India’s appeal as a safer bet in the high-risk emerging market (EM) pack. The economy expanded 7.3% in 2014-15 versus 6.9% in 2013-14, indicating that the Indian economy is taking root. Of course, it has its set of issues like political gridlock, inflation woes, and a still-muted investment backdrop, but the economy appears much more stable than other emerging markets. A Look at Other Emerging Giants At this point of time, India scores higher than its other EM cousins like China, Brazil, Russia and South Africa. Chinese stocks are now infamous for extreme volatility having experienced recurrent market crashes since June. The country’s economy has also been displaying offhand economic data for long, leaving expectations for further monetary easing as the only hope in the China Investing theme. Popular Chinese equity ETF FXI was 7.8% down in the last one month. Coming to Brazil , the condition is more worrisome. As much as a 7.4% fall in the Brazilian real in the last one month (as of August 5, 2015) against the U.S. dollar, a commodity market slump, spiraling inflation and raise in rates (presently as high as 14.25% , almost double that of India’s) have crippled the Brazilian economy. Analysts have raised the 2015 inflation outlook for Brazil from 9.23% to 9.25% while its GDP is expected to shrink by 1.8% from the prior forecast of 1.76% contraction. The largest Brazilian ETF EWZ was down about 13% in the last one month. Russia is yet another emerging market which turned a bear from once-a-bull country. An unbelievably prolonged and steep fall in oil prices, Western bans and an 11.7% one-month slide in the Russian currency clearly explain the pains for this oil-rich nation. The IMF now expects the Russian economy to skid into ” deep recession ” (down 3.4%) in 2015. The most popular Russian ETF RSX lost 4.7% in the last one month. The Indonesian currency was almost resilient to dollar gains but weak corporate earnings and a spate of soft economic data weighed heavily on investors’ sentiments. Dollar gained just 1.2% in the last one month against Indonesian Rupiah. The World Bank also slashed its projection for Indonesia’s 2015 economic growth from 5.2% to 4.7%. Indonesia ETF EIDO was off 3% in the last one month. South Africa’s currency shed about 3.3% in strength in the last one month (as of August 5, 2015) and growth prospects remain bleak. This is also a commodity-rich nation and will likely the bear the brunt of the commodity market crash. South African ETF EZA retreated 2.2% in the last one month. Turkish lira also slipped 3.3% last month (as of August 5, 2015). Along with this, political upheaval and still-subdued growth in the EM pack led the Turkey ETF TUR to shed about 9% in the past 30 days. Reasons to Cheer for Indian Small Caps Since small caps better reflect an economy’s strength and are largely unruffled by global shocks, Indian small caps should be the best-positioned EM options right now. Investors are advised to take a peek into our top-ranked ETFs, India Small Cap ETF (NYSEARCA: SCIN ), India Small-Cap Index ETF (NYSEARCA: SCIF ) and iShares MSCI India Small Cap Index Fund (BATS: SMIN ). Each carries a Zacks ETF Rank #2 (Buy). SCIN, SCIF and SMIN added 9.2%, 9.7% and 6.8%, respectively, in the last one-month period while in the past one-week frame, the trio advanced 5.5%, 4.7% and 4.8% (as of August 5, 2015). Original Post