Big Gains Come in All Sorts of Packages

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Investing is a harsh taskmaster. Each day, cold, hard numbers tell you what you got right and what you got wrong.

If you’ve been bullish on a country’s stock market and that country lights up the scoreboard with big gains, you feel vindicated about your powers of prognostication.

Sometimes the country you tap for big gains is a turnaround story and one where the markets have been beaten down too far, too fast. That’s what the original Global Guru, John Templeton, did, investing only in the countries where “the outlook was always the worst.”

Other times, a country’s stock market strength is based purely on momentum and the influx of “hot money” flowing into that market.

Finally, a country’s strong stock market performance can just leave you scratching your head. It is hard to come up with a rational explanation even with the benefit of 20/20 hindsight.

On Monday, I saw examples of all three cases as I surveyed the 46 global stock markets I monitor daily at my firm, Global Guru Capital.

It turns out that the top three markets of 2015 so far have come from big gains in a once beaten-down market; a stock market bubble that will end in tears; and, most interestingly, in a country that is far off the radar screen of even the most sophisticated global investors.

NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

First Place: Russia — An ‘I Told You So’ Moment

So, what did my latest survey of top-performing global markets reveal?

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First, it showed me that my bullish call in July 2014 on Russian stocks is paying off big time.

Year to date, the Market Vectors Russia ETF (RSX) is the best-performing global equity market with a total return of 31%.

Plunging oil prices, a ruptured ruble and Western economic sanctions prompted by the annexation of Crimea made the Russian equity market an investment pariah.

As sure as day follows night, an extremely bearish article on Russia and its wounded economy on the cover of The Economist magazine appeared in November of 2014.

That’s also when I wrote about how this epic bad press could be the turning point investors needed to get back into Russian equities.

The pendulum had swung against Russian stocks way too far. It was time to grit your teeth and buy Russia.

Second Place: China — A Living, Breathing Bubble

The second-best-performing market in 2015 is the once-again-trendy China. The iShares China Large-Cap (FXI), the benchmark fund for China, has delivered a total return of 21.12% year to date (YTD).

I say once again trendy because a few years back no market was hotter than China, as the endless promises of the “China Miracle” once filling your email inbox could attest.

Of course, with the benefit of hindsight, everyone “knew” the Chinese stock bubble was destined to burst. Sadly, once the music in this game of musical chairs stopped, many investors couldn’t find a seat and suffered tremendous losses.

Now it appears we’ve come full circle.

As economist John Kenneth Galbraith observed, “The financial memory is very short.”

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The Chinese stock market bubble is back. It recently has been reported that the Chinese have started taking second mortgages to funnel capital into the Chinese equity market boom. More and more Chinese are scrambling to get in on the action, as 1.68 million new brokerage accounts were opened in the week ended April 10.

A recent analysis in the Financial Times of Chinese valuations shows just how frothy this bubble has become. For example, consider the data here regarding the median company’s valuation, based on forward price/earnings (P/E) ratios, in the following markets:

  • Shanghai market: 30x
  • Shenzhen market: 39x
  • S&P 500, Russell 2000, Nasdaq Composite: 18x

The Financial Times also points out that in China’s Shenzhen market, half of the stocks followed by analysts have forward P/E ratios above 50. In the Shanghai market, only about one-third of stocks have forward P/E ratios above 50. In the U.S.-based small-cap Russell 2000, less than a tenth of the stocks have a forward P/E above 50.

Here’s my prediction. The Chinese citizens taking out second mortgages are going to lose a lot of money. This kind of bubble-induced frenzy of buying always ends with a painful crash.

Third Place: Argentina — the Biggest Surprise

Argentina and its capital of Buenos Aries boast a terrific Bohemian energy, great steaks and, of course, the Tango — all of which combine to make it one of the most attractive places in the world to visit.

But when you think of trailblazing stock markets, Argentina is not the first place that comes to mind. Despite this, so far in 2015, the Global X MSCI Argentina ETF (ARGT) has the final spot on the performance podium with a year-to-date total return of 15.39%.

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I must admit, this fantastic showing for a relatively small South American equity market isn’t something I expected.

In the case of Russia and China, you could make an argument as to why money could flow into those two markets — although for very different reasons.

In the case of Argentina, the buying there isn’t immediately obvious. And it’s still something I find hard to explain.

After all, the country defaulted on its sovereign debt last year. Today, it’s struggling to make a deal with jilted bondholders. Argentina also faces some $12 billion in debt payments coming due next year. And this is the country whose leadership is so kooky that it imposed price controls on the Big Mac so that its true inflationary figures wouldn’t be reflected in the Economist’s annual “Big Mac” Index.

What’s the potential upside?

There is a prospect of a new, center-right president taking office as a result of the upcoming October elections.

Which is, I suppose, more than what you can say for Russia.

In case you missed it, I encourage you to read the e-letter column from last week about whether to hedge out European currency risks. I also invite you to comment in the space provided below my commentary.

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