Oxstones Investment Club™As you probably know by now if you’ve been dipping into these reports, I’m bullish on emerging markets.
Fact is if you want to make big returns over the next decade, you’ve simply got to have some emerging markets exposure in your portfolio.
Period.
Stick with only U.S. stocks and you’ll be lucky to outpace inflation and taxes. And I mean really lucky.
No matter which way you slice and dice it, the emerging stock markets have been a far better place for your money than U.S. stock markets.
Over the past decade, the emerging markets have tripled in value. Meanwhile, U.S. stocks have delivered negative returns.
And this trend shows no sign of letting up.
According to the IMF, emerging economies will expand 6.4% next year – almost three times the projected growth of the U.S.
And fund flow data shows that investors are betting big on this growth phenomenon. So far this year, emerging market mutual funds brought in more than $60 billion. This is on pace for record inflows.
This is the story you know by now. Or at least it’s the story you should know by now.
The story you may not know is that some very sophisticated and deep-pocketed investors just placed a $10 billion bet that could mean emerging markets stocks will surge even higher, as we close out the year.
Let me explain…
On Monday, a group of investors – about half of them from overseas…and about half of them big institutions – bought United States government bonds that effectively have a negative rate of return.
These investors just paid $105.50 for every $100 of bonds the government sold – effectively agreeing to pay the government for the privilege of lending it money.
Why?
Because the bonds they bought…known as Treasury Inflation Protected Securities or TIPS…offer a guaranteed protection against inflation.
If inflation surges – as these investors believe it will – the value of these TIPS would rise…and compensate them for the premium they paid for them.
In other words, these wealthy investors are betting $10 billion that the Fed will succeed in its goal of creating inflation. If they’re right, it will push even more dollar-based investors into emerging market equities.
That’s because these equities: (a) are likely to outpace inflation and (b) offer investors currency diversification away from the dollar.
Are We Reaching the Bottom of the Inflation Cycle?
It’s all about cycles.
If we have reached the bottom of the inflation cycle and are about to start moving higher, it’s extremely bullish for emerging equities, as these tend to perform well in higher-inflation environments.
Think of it this way. In an inflationary environment, the value of cash goes down versus the value of other assets such as gold, energy and domestic and overseas stocks.
What would you do if you were holding on to cash that was losing purchasing power? Would you leave it under the mattress for a rainy day?
I doubt it. Instead, you’d probably swap that cash for assets that held their value or went up in value.
Well, that’s exactly what investors will do if the Fed does spark off an inflationary period. They’ll start swapping their dollars for gold. They’ll start swapping their dollars for agricultural commodities. They’ll start swapping their dollars for metals. And they’ll start swapping their dollars for emerging market stocks.
As top Société Générale analyst Dylan Grice put it recently:
“The combination of healthy government finances, young populations, and hard-working people with low income levels makes developing nations ‘compelling’ investment destinations.
“What happens when you have a compelling investment case and too much liquidity? You get rampant asset price inflation.”
Of course, you need to know what you’re doing when you buy into emerging markets. Not every market is created equal. And some will perform better than others.
But if Monday’s bond auction buyers are right, we could be closer than you think to the next big phase of the emerging markets rally.
Source: internationalliving.com
Tags: emerging stock markets, investors, tips, US government bonds