Investors are moving back into emerging-market funds and it is not due to their great research. They are just chasing after recent outperformance and will continue to do so as U.S. equities slowly retreat while BRICs and related assets surge.
The following two articles illustrate the value and direction of the emerging markets.
Investors are still making massive inflows into U.S. equity funds, just as they always do very close to market tops. Meanwhile, emerging-market equities have continued to rebound while gold and silver mining shares, which were the biggest winners during the first several weeks of winter, have been among the weakest sectors during the past months. The latter present an additional buying opportunity prior to the next phases of their rallies.
Weakness in emerging markets is not new and has been going on for the better part of three years now. The real crisis remains the massive gap between U.S. stocks and inflation expectation. When you have such an extreme in one direction there is always a counter extreme to the other direction.
Emerging-market behavior continues to baffle most investors who were wildly excited about buying in early 2008 and again in early 2011, and were extremely worried about their prospects in early 2009 and early 2014. The old story of “buy high – sell low” is never going away thanks to the human’s emotional roller coaster of greed and fear. The financial markets will repeatedly punish those who try to catch each wave, which is the strongest emotional tendency, while rewarding those who make the most difficult psychological moves such as buying into extended weakness and selling into extended strength.