Well folks, there is lots of buzzz this AM re. the vast opportunities supposedly afforded by the "emerging markets." (See our earlier blog, "Emerging Markets, Submerging Markets"). The initial Fed rate cut will supposedly generate a "bubble" in these markets; implicitly, according to the mass market sages, it's time to hop on board before the moonshot gets underway.
We hate to be party poopers, but we think it might be prudent to consider that the emerging market index HAS ALREADY RISEN nigh onto 500% over the past 5 or 6 years. We have gone from a situation where these markets were selling at a SUBSTANTIAL DISCOUNT to the U.S. equity market to the CURRENT situation, where many of them are selling at SIZABLE PREMIUMS to the U.S equity market. Moreover, U.S. stock prices have risen only a small fraction of the rise in foreign markets.
Why then should this be the time to buy foreign stocks? Why is it now de rigeur for EVERY INVESTOR to have an emerging market allocation in his/her portfolio? Where were Wall Steet's platinum-plated (or, should we say nickel-plated?) asset allocators five years ago, when emerging markets were ONE-FIFTH of what they are today?
The answer is clear. The farther up markets go, the farther they have yet to go.
JUST KIDDING! As those of you familiar with our thinking know, the EXACT OPPOSITE is the case.
Wall Street's perennial trumpet is now being sounded: "LEMMINGS! ALL ABOARD!" Yes, the time has come for the next over-the-cliff ride, we guess.
We are NOT saying that emerging markets will not rise further. After all, tek stocks rose -- and rose a lot -- during the second half of 1999 and the early months of 2000. However, we will all remember what transpired subsequently.
What we are saying is for those who have not yet thrown prudence to the wind, a calculus of the relative risk/reward ratios leaves no doubt about the most attractive area for investment: high quality U.S. growth stocks.
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