Emerging Market Rally – Asset Bubble or Real?

Wednesday, 11 Jun 2014 07:56 AM

By Ashish Advani

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You know I have been a skeptic of the various claims made by the Western countries about growth and that 2 percent to 3 percent sustained GDP growth is here now. I have always advised you to check under the hood of the headline data events. Yet the market makers get carried away like sheep being led to the slaughterhouse.

An example is the jobs report last week. We saw creation of 217,000 new jobs. Granted the stock pundits on CNBC did put up token resistance saying that the jobs created were not high-paying jobs, but they soon succumbed and suggested we buy stocks.

The Bureau of Labor Statistics, which publishes the data, noted on its website (Birth Death Rate Model) that 205,000 jobs were an estimate of jobs that "must have gotten created." Not sure, no proof, but still an estimate of jobs being created — ghost jobs. Last month was no better when the headline jobs creation number was 288,000 jobs created, of which we had 235,000 ghost jobs.

Combined for the two months we created 65,000 low-paying real jobs.

You tell me, does this sound like we are in the midst of a full-blown recovery and the Dow Jones Industrial Average ought to be at 17,000?

The Dow is not the only stock market reaching astronomical heights. All over the emerging markets we are observing rallies. As much as my optimistic mind likes to hope that this is for real, I am pragmatic to also believe that Hope is not a strategy.

There are a few causes for this rally in the emerging markets. The biggest one is the hype that United States is in full recovery, which leads the Asian giants to overproduce and stock up anticipating demand.

Then we have the watershed event of the European Central Bank (ECB) of last week, which is adding real fuel to the roaring fire. The ECB announced several measures to supply liquidity to the European markets including cheaper rates of borrowing.

The ECB has also taken the drastic step to penalize deposits of cash. If you are foolish enough to want to live within your means and actually save for the future, the ECB will now charge you 0.1 percent for you to keep your cash safely in the banking system.

As a result of such insane policies, investors are rushing out to spend or invest all their cash. Not finding real reasons to invest in the Western markets, they are dumping large amounts of cash in emerging markets without real analysis or true understanding of the risks.

India may have a story to tell, but it is far too early in the new government's life to merit the stock markets to rise by nearly a third in the past few months. Even the rupee surged to solid levels before retracing a bit. It is far too early to know if the policies of the new government will aid growth or are they just making populist decision right now.

I would be cautious in investing in such markets unless we have taken adequate time to analyze the fundamentals and realize we have a bargain when we buy.

With Russia beginning to show restraint, I believe the Poland stock markets, which has taken a beating due to geopolitical reasons, will surge 5 percent to 10 percent in the next several weeks. If you use options to carefully invest in that market, you will likely realize handsome gains in the next few months.

Happy investing!

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