Technology Sell-Off Continues. Rotation Back into Emerging Markets?

Nicholas Vardy

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

Last week was a tough one for U.S. stock markets, with the Dow Jones down 1.67% and the S&P 500 tumbling 1.78%. Technology stocks continued to slide, as the NASDAQ tumbled 3.63%. Meanwhile, global markets rallied, with the MCSI Emerging Markets Index up 1.13%, continuing its month-long rally.

No big surprise then that it was two of your global holdings in your Alpha Investor Letter portfolio, the Market Vectors Gulf States Index ETF (MES) and the Vanguard Global ex-US Real Estate ETF (VNQI), which were the week’s big gainers, rising 2.9% and 1.08%, respectively.

Both the Market Vectors Gulf States Index ETF (MES) and the PowerShares Buyback Achievers (PKW) exchange-traded fund (ETF) also hit new 52-week highs.

Several of your positions fell below their 50-day moving averages and moved to a HOLD. These include WisdomTree Japan Hedged Equity (DXJ), First Trust US IPO Index (FPX), Guggenheim Spin-Off (CSD), WisdomTree Japan SmallCap Dividend (DFJ), Global X Guru Index ETF (GURU), The Blackstone Group L.P. (BX), Las Vegas Sands Corp. (LVS) and the Vanguard Russell 2000 Index ETF (VTWO).

Clearly, investors are shifting out of higher-risk, small-cap names in favor of lower-valuation stocks. The question is whether this is one of Mr. Market’s mood swings or the beginning of a longer-term trend. I believe the jury is still out. If these stocks indeed get to even more oversold levels, we could see a big bounce, very quickly.

One trend, however, is becoming clear over the past month or so. Investors are putting money back into global and emerging markets.

Of the 45 global stock markets I follow on a daily basis, 11 are up by double-digit percentages this year. Two are represented among your Alpha Investor Letter holdings — the Market Vectors Gulf States Index ETF (MES) is #3 with a gain of 21.18%, and the iShares MSCI Ireland Capped (EIRL) is #12 with a gain of 9.07%. The U.S. market is #31 on that same list, barely eking out a positive return.

This is good news that signals that global financial markets are returning to normal.

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Over the last few years, the U.S. stock market has been the place to be. If you were invested out of the United States, you missed out on some big gains. Even after their recent rally, emerging markets are trading where they were in January of 2010, while the S&P 500 has rallied over 85%.

EEM 4/8/2014

After trailing the U.S. stock market by 38% in 2013, the difference between the relative performance of the U.S. market and the rest of the world has not been this great in almost a decade. Today, the MSCI Emerging Markets Index is trading at a price-to-earnings (P/E) ratio of 10.6. That compares with a P/E of 15.2 times for stocks from advanced economies. The U.S. S&P 500 is closer to 17. That’s the biggest discount for emerging markets since 2006.

Much like technology stocks, once emerging markets get going, they can be big momentum plays. It is actually fairly typical for certain emerging markets to be up 50%, 60% or even 80% in a calendar year.

If the current turnaround is the start of a more sustained rally, look for emerging markets to morph into the new favorite of momentum investors. And don’t be surprised to see more global stock market recommendations in the coming issues of the Alpha Investor Letter.

Portfolio Update

Berkshire Hathaway Class B Shares (BRK-B) dipped 1.40% last week. Although most market sectors have not escaped the broad pullback in the markets, Berkshire Hathaway has remained quite steady as it enters its fourth week of sideways trading. BRK-B also maintains its perfect 0% short interest ranking. BRK-B is a BUY.

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iShares MSCI Ireland Capped Investable Market Index (EIRL) lost 2.18%. The Irish Central Bank (ICB) released its economic forecast last week, calling for continued recovery in Ireland. Unemployment is expected to drop 2% from 2013 to 2014, and by another 1% for 2015. The ICB also predicts that the gross domestic product (GDP) will accelerate to 3.2% into 2015, and the gross national product (GNP) will rise 5.1% into 2015. That would make Ireland, by far, the fastest-growing economy in Europe. EIRL is a BUY.

WisdomTree Japan Hedged Equity (DXJ) fell 4.51% over the past five trading days. DXJ pulled back last week on news that the Bank of Japan may not be providing additional near-term economic stimulus. This also pushed the yen higher, giving the Japanese currency its strongest one-day gain over the past month, hurting DXJ. DXJ is now a HOLD.

Google, Inc. (GOOGL) lost 2.16%. I highlighted Google’s stock split last week in your Alpha Investor Letter update, and you should now see the effects of the stock split in your account. Note that your position in “GOOG” is now “GOOGL” and that Google’s stock split two-for-one. That’s why you have twice the shares in your account and why the stock price and my recommended stop price halved. The good news is that when an excellent company’s stock splits, it usually will see gains over the months that follow. Be sure to move your stop price to $484.00. Google will report earnings on April 16, after markets close. GOOGL is a HOLD.

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iShares S&P Global Timber & Forestry ETF (WOOD) dipped 1.31%. WOOD gives you exposure to not only timber, but the paper-manufacturing industry as well — providing a bit of diversification within the wood-based sector. This exchange-traded fund currently tracks 26 global forestry-related names. WOOD is a HOLD.

Vanguard Global ex-US Real Estate ETF (VNQI) added 1.08% last week. Global real estate has been bucking the downward U.S. stock trend over the past several weeks and rising in your portfolio. In fact, VNQI has gained over 5% in just the past three weeks. VNQI also crossed above its 200-day moving average (MA), a good sign for future gains. VNQI is a BUY.

Market Vectors Gulf States Index ETF (MES) gained 2.90%. MES continues to be a bright spot in your portfolio. Your bet on the Gulf States has added gains nearly every single day since my mid-February recommendation. Although clearly a bet on the oil-producing states surrounding the Persian Gulf, the recent return of the emerging markets has served as a tailwind as well. MES remains a BUY.

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