China And Emerging Markets: Value Investing And Market Psychology

China And Emerging Markets: Value Investing And Market Psychology

China And Emerging Markets Davidson” submits:

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[Within the context of being a Value Investor, China and Emerging Markets offered us opportunity with the lows of 2008-2009 and I recommended that investors buy into this asset class-see the $EEM-EmgMkt ETF chart below. But, once we hit early 2011, the levels were so high historically that I recommended that investors shift to other asset classes. The chart shows that we never achieved the low prices since to be able to reenter this asset class nor has the asset class provided additional returns beyond what we achieved in the 2yrs 2009-2011. As things currently stand, EmgMkts do not appear attractive.

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The FXI-Chinese Market ETF is part of the EEM and has occupied the media since fall 2014-see the FXI-Chinese Market ETF below. First $FXI soared more than 60% from lows of 32 to a high over 52 (the Shenzhen Stock Exchange Composite Index rose from 1,000 to over 3,200 over the same period). The media of course focused on the Shenzhen Index and most investors believed they were missing out on opportunity. But, being a Value Investor, I know that such market moves are never tied to economics because economic activity moves only very slowly. At the current publically stated Chinese growth rate of 7% it would take 11yrs for value to double. Therefore, for a market to nearly triple in 12mos only market psychology could be responsible. Investing to capture changes in market psychology is very hazardous in my perception and I do not recommend trying to do so.

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Shenzhen Index nearly tripled in 12mos due to market psychology.

Screen Shot 2015-07-08 at 9.57.31 AM China

Market psychology is at all times a significant factor in any market. It is the goal of the Value Investor to recognize the differences between when prices represent good value and when they represent excess valuation due to market psychology. For this reason I have not recommended China and EmgMkts since 2011 and continue to avoid this asset class.

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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