What happened to the benefit of diversifying across different types of assets? Shouldn’t it be beneficial to own a mix of foreign stocks, U.S. stocks, foreign bonds, U.S. bonds and commodities (e.g., gold, oil, etc.)?
Here‚Äôs a quick look at what has transpired over the last 3 months:
|Asset Classes Over 3 Months (2nd Quarter)||¬†||¬†|
|U.S. Stocks via S&P 500 SPDR Trust (SPY)||¬†||¬†||2.4%|
|Europe/Far East Stocks via iShares MSCI EAFE (EAFE)||-2.8%|
|U.S. Bonds via Vanguard Total Bond (BND)||¬†||-3.1%|
|Foreign Bonds via Powershares Int’l Corporate (PICB)||-4.3%|
|Commodities via PowerShares DB Commodity (DBC)||-8.0%|
|Emerging Market Stocks via iShares MSCI Emerging (EEM)||-10.0%|
The current pattern brings into question traditional investing principles like diversification. The greater the exposure to U.S. common stocks alone, the more an investor has prospered. Meanwhile, every other asset grouping has dragged on overall performance.
Granted, 3 months does not establish a pattern. On the other hand, non-U.S. equity underperformance can be traced back to euro-zone collapse fears in 2010. Many will remember that U.S. stocks fared far worse than foreign developed stocks or emerging market stocks in the previous decade. The massive amount of money printing and subsequent rate manipulation by the U.S. Federal Reserve in the current decade, however, has created a certain level of euphoria for U.S. stocks, U.S., bonds and domestic real estate.
Nowhere is the trend more disappointing than with emerging market equities. Specifically, an exceptionally low annual correlation between SPY and EEM (0.2) is supposed to be the “money-making” free lunch that helps you sleep better at night. In the case of the MSCI Emerging Market Index tracker, though, ownership has been an intermediate-term exercise in dissatisfaction; lately, EEM has not been a safer haven nor an alternative pathway to gains.
Obviously, the buy-n-hold advocate would address 10-year time horizons for an asset with a current price-to-earnings ratio of 10. Yet valuations for EEM have been attractive for years and it has traded at an unusually large discount to developed world stock ETFs for years as well. What’s more, P/Es can always get cheaper.
I would hardly consider myself bearish on emerging market equities. Yet there are plenty of macro-economic reasons to suspect that murkier depths may lie ahead. I would only wade into an emerging market ETF if the current price is holding above a 50-day moving average; I would employ a trailing stop-limit loss order for protection.
At the moment, there are few emerging market investments that fit the bill. PowerShares Golden Dragon Halter China Portfolio (PGJ) could be a surprising winner. Its 50-day trendline remains above its 200-day trendline, suggesting that its uptrend is intact. Moreover, the fund has consistently hit “higher lows” over the last 12 months.
If you’re really adventurous, you could consider a trip that is further out on the frontier. Market Vectors Gulf States (MES) has quietly managed to hold onto an impressive year-long uptrend with its exposure to Qatar, Kuwait and the United Arab Emirates (UAE). With a 60% weighting to financial companies, there may be a sense that the banks in the region are “safer” than those in Europe.
Indeed, some would maintain that investing in developed world funds representing Europe or Japan should be scarier. Yet the markets have decided that extraordinary amounts of conventional and unconventional central bank stimulus act as a powerful backstop against flailing economies, teetering financial institutions and unsustainable debt loads. Someday, broad-based emerging market ETFs will win back the confidence of the global investment community. For the time being, though, it may be slim pickings.