Stocks: Be Greedy When Politicians Are Fearful

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks were essentially unchanged today, albeit with a slight positive bias -- the S&P 500 (SNPINDEX: ^GSPC  ) remained in the black all day. The index finished the session up just .12%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) could only manage a 0.04% advance.

Given that lack of conviction, it's not surprising that the CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) barely moved, as well, registering a 0.69% decline -- the VIX, Wall Street's "fear index," is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.

G-20 summit: The flip side of crisis is opportunity
World leaders are presently gathered in St. Petersburg, Russia for a G-20 summit that concludes tomorrow. Naturally, Syria is a hot topic of conversation; summit host and Russian president Vladimir Putin called U.S. Secretary of State John Kerry a liar only yesterday in regard to his allegations that the Syrian regime has used chemical weapons!

However, there's another topic that's weighing on attendees: That of a potential slow-brewing crisis in emerging markets that some developing economy politicians have been happy to blame on the Federal Reserve. Those allegations are not without some justification, as the U.S. central bank has essentially been exporting its zero-interest rate policy, and creating large amounts of liquidity, some of which naturally ended up sloshing into (and, more recently, out of) foreign asset markets.

The argument is that recent underperformance has been sparked by talk of a "taper" in the Fed's monthly bond-buying program, which first surfaced on May 22. The following graph, which starts on that date, illustrates that two of the largest emerging markets, Brazil and India, have been among the worst underperformers:

EEM Chart

EEM data by YCharts

However, where politicians and short-term market speculators may fear a looming crisis, patient capital is beginning to see rising opportunity. Reuters published an interesting article today that highlights why some foreign investors are buying India. Jan Dehn, head of research at the Ashmore Group in London offers the following insight:

"The market is obviously currently gripped in a sense of panic and, as such, it is not paying a lot of attention to the underlying fundamentals. What happens in these situations is that where the market has gone and what actually exists on the ground in reality have parted ways with each other."

That chasm between market perception and underlying fundamentals is the very definition of opportunity; however, as the article title, "Darkest before dawn," suggests, it takes a bit of a contrarian streak to seize it -- that, and some tolerance for volatility and an equity-appropriate time horizon.

Granted, it's not entirely surprising that the head of research at a leading emerging markets fund manager should be bullish on an emerging market, but the Ashmore Group isn't just some bunch of cheerleaders; it's a disciplined, value-focused outfit with a track record of success to show for it.

At the end of last month, I wrote that emerging markets are the markets that investors ought to be looking at now – either in terms of overall asset allocation, or as fertile ground for individual stock picks. I'm reiterating that today, and will continue to do so until I think that remains the case. Personally, I like the iShares MSCI Turkey ETF (NYSEMKT: TUR  ) , which has been hammered, and is now significantly cheaper than the iShares MSCI Emerging Markets ETF (NYSEMKT: EEM  ) .

If you prefer to invest in U.S. stocks, you can still take advantage of trends in emerging economies. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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