Matthew Lekushoff |
Emerging markets | Gold predictability | Trump

After what has felt a little like death by 1000 cuts over the last few months, most stock markets around the world have enjoyed fairly strong growth the last two weeks. The two biggest movers have been energy prices and emerging markets, both of which started the year much weaker than many other asset classes.
Of course there is no way to know if this will continue in the near future, however we welcome this change and continue as ever to monitor market conditions in search for opportunities to prudently improve portfolio performance.
In Depth: Emerging Markets
Every so often I'll be featuring an asset class to provide a better understanding of our investments, why we own them, and most importantly, why it's important that we do.
This first asset class feature will cover emerging markets -generally referring to countries with a lower GDP per capita, or citizen, than developed nations. These countries include China, India, Indonesia, Mexico, Brazil, Russia, and South Africa, but there are many more. And yes, China is an emerging market even though its national GDP is the second largest in the world. Its per capita GDP is still much smaller than developed countries once you consider its huge population.

Given emerging markets ' smaller per capita base, their growth is much faster than developed nations like the U.S., Germany, or Canada. However, this growth is much more unpredictable, making their markets more volatile. China grew over 8% per year for a decade or so and India is expected to grow by more than 7% this year and potentially years to come. 
The odds of growth like that happening in the developed world are very small. Put it this way, it's easier for someone to double their income if they're earning $5/hr than if they're making $40/hr.

In 2015, the emerging markets, led by China, had relatively poor returns. However, when prices go down significantly, especially when it's not due to underlying fundamentals like earnings and book value, their valuations can be very appealing. According to Research Affiliates , "The Shiller P/E Ratio, (for emerging markets) a measure of valuation based on cyclically adjusted price-to-earnings ratio, fell to 10 in January. There have been only six times when the measure has dipped below 10 over the past 25 years. In the following five years, the stocks rallied an average 188 percent." 
This does not mean huge gains are guaranteed right away, but knowing their prices are historically cheap, coupled with their better-than-average growth prospects is a rather bullish sign.

As I know many of our readers have enjoyed the charts we've added in past letters, there are a few here that will give you a good perspective on emerging markets, especially relative to the developed world. First (image above), is a direct comparison of China and the U.S. in a number of areas. The second also features China in relation to the U.S. , but includes comparisons to other nations. And the third chart  shows the top 32 countries based on  purchasing power parity today, and projections for 2050 (though it's highly subjective to project that far in advance).
The underperformance of emerging markets has led us to rebalance our portfolios, adding to our EM positions. There's no guarantee this will pay off immediately, but rebalancing has historically added to portfolio returns while reducing risk.
As one could predict...

As mentioned in our  last newsletter , gold has had a great start to the year. Adding to our gold positions in 2015, when it was undervalued, allowed us to reap the benefits of its recent surge. This in turn has recently allowed us to trim our overweight gold position somewhat, enabling us to add to underweighted securities like energy and the just mentioned emerging markets. 
Well, given the knee jerk reaction of most investors, it should be no surprise that  sales of gold ETFs hit a record  in February, as investors predictably chase investments with the best recent returns instead of looking for bargains like energy or emerging markets.

Going viral
  • I usually stay away from political commentary, but I thought this brief re-take of The Producers was funny enough to share!
Happy trails
Last, but certainly not least, it is with mixed emotions that I write of Vikki Brown's departure on March 18. Although our time together has been invaluable, Vikki has decided to follow her passion and work full time on financial planning with one of Raymond James' sister companies. As I know many of you have really enjoyed working with her, feel free to reach out her through email  or at  416-777-7182 .
While we search for Vikki's replacement, the excellent Ruby Fernandes will be working with us. You can reach Ruby  by email  or at 416-777-7004 .


Matthew Lekushoff, CIMA

Financial Advisor 

Raymond James Ltd.


T: 416-777-6368 | F: 416-777-7020


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