Revenge of the Individual Investor.
Revenge of the Individual Investor.
The Asian markets have sold off a bit here lately because in the West they decided our inflation is rising (only food actually -and this is normal before Chinese New Year) and so the gnomes in the developed world are trading out of Asian ETF's –with all their rage! There are currently over 3000 ETF's index funds traded and they dominate the global sentiment by ganging-up together.
It is one more reason to be biased on smaller cap., high dividend stocks as they are not included in ETF's, and so move around more to their tune rather then moods of ETF’s. This shows up in their lower the market average beta’s. Our stock picks here should pay nice dividends in April/May, likely double the average Thai SET index stocks.
Many years ago one key reason why it made sense investment wise to diversify across countries is that each country had (and still does) its own fundamentals and cycle and so they often were less then correlated. Non-correlation is an important concept in portfolio management -as it reduces volatility.
In the past there was always an “investment party going on somewhere” and astute global investors could move funds to where it was happening, at a particular time. Index funds, so called ETF’s, have changed all this to an alarming degree.
Today most emerging markets investing is done through big institutions with such ETF’s, and so move by sentiment in the developed markets. In year 2007, as just one example, a number of good well managed companies went bankrupt in developing markets -only due to these ETF’ spurring out of mega billions, only so to cover losses in their home developed countries. The US lead financial crisis so induced all kinds of dreadful repercussions in at the time many stable and not over-leveraged developing countries, blue chip companies.
Far from decoupling, emerging markets are now attached to the rest of the world, ever more and more then ever before. The acute problem with ETF’s is the behaviour they encourage. “ETF on developing countries is driven by sentiment in the developing world, not the economic facts of the developing world” *. These ETF’s make indiscriminate bets on countries and sectors, rather then on-the ground detective work which I do here since 1989.
This mega ETF trend, far too often unmentioned in the daily press, is yet one more reason why shrewd individual investors should consider high yielding smaller cap gems as the valuation on these has been distorted by ever bigger mega-wave of index funds. (ETF’s). Yet, these distortions work to our advantage as the dividend yield of these smaller unleveraged growth companies are often double the index, while their p/e’s as low as half the index averages.
The devil of the index funds is all very well documented in recent books and articles. See for example * “The Fearful Rise of Markets” by John Authers (2010) Global Meltdowns and Synchronized Bubbles.
Best Regards,
Paul A. Renaud.
www.thaistocks.com
