Gundlach and Emerging Markets

Every year the Sohn Foundation puts on an investment symposium in New York City in order to raise money for charity.  They have some of Wall Street's most well known investors come serve up investment ideas to a conference hall packed of investors and media types.  Yesterday at the conference, Doubleline's Jeffrey Gundlach caused a bit of a stir  when he recommended buying emerging markets ETFs and shorting the S&P 500.  

Briefly, here's what Gundlach said yesterday about investing abroad.  He noted that emerging markets cyclically adjusted price-earnings or CAPE ratio is half that of the United States".  He also said that he felt there was "not a lot of upside" left in being long the S&P 500, while noting  that the trend going back to 2010 of the S&P 500 out-performing emerging market stocks had been broken".  We've also discussed several times in the past year our reasons for looking abroad for investments.  You can go read us here, {four reasons why you should still invest abroad} here {10 year chart of expected returns on different markets around the world} and most recently here {where we noticed the beginning of a change in relative strength between US and foreign equities} to get some idea on why we've thought for quite awhile that investors would be best served longer term by having investments in these markets.

First, the reason you might want to pay attention to what Gundlach says is that often he's right.  Gundlach correctly predicted the Federal Reserve would keep interest rates low back at the end of 2015 and early 2016 when the stock market last blew a gasket on fears of a Fed tightening into the teeth of what was then seen as a slowing economy.  In investment circles though he is best remembered for correctly predicting that Donald Trump would become our next President back last year when most of the world thought Trump's prospects were dim.   

The second reason is that on a relative basis, money has been flowing  into many international markets and investment styles since last year.  This performance chart of international markets shows that broadly they have held their own or slightly outperformed the S&P 500 since last summer.  

Performance Chart From Stockcharts.com.

You can double-click on the chart to make it larger.

Another reason to take a look at these investments is for dividends.  Many international stocks and ETFs pay dividends well above what you can earn investing at home.  Case in point is the S&P 500.  It currently pays about a 1.90% dividend.  The Vanguard FTSE Europe ETF {VGK} has a current stated dividend yield of 3.20%, the WisdomTree Emerging Markets High Dividend ETF {DEM}.  Even if the markets stagnate for a bit, you are paid to wait by holding onto these funds.   {Please note that I currently am an investor in both VGK and DEM in both personal and client accounts and both clients and personal accounts invest in ETFs related to the S&P 500.  I am also personally short SPY as part of a trade in a personal account of mine.  I do not short stocks or ETFs for clients.}

The last reason I'll give you today on why you might want to pay attention to what Gunlach says is that an investor like that has heft in both investor and media circles.  Look, it's not like investors haven't known for quite awhile that the US markets are expensive versus its peers abroad.  It's just that international markets have basically languished for the better part of a decade while the US markets were off to the races.  Money follows performance and investors for the most part have chosen to ride the train that took them where they wanted to go in the faster manner possible.  A call like Gundlach's provides cover for both the media and institutional investment here to begin changing direction in a way they may have been unwilling to go prior to yesterday.   These ETFs may not react right away as some of these markets are now over-bought by our work.  However, the institutional memory of what Gundlach said yesterday could put a floor under these names so that money may begin rotating away from the US into markets abroad in the back half of the year, especially if economic conditions stay the same here and we see relative improvement in overseas economies.

Finally note the following.  Again, these markets have had a decent run this year so don't be surprised if at some point we don't see a bit of a sell-off abroad.  Also these markets can be more volatile than US shares.  Make sure you can stomach the volatility before you make any investments in this area.  

See below for all disclaimers.

Nothing in this column should be considered investment advice.  Investors should do their own homework and/or discuss all investments discussed in this or any post from our firm with their advisors before making any decisions.  Investors should carefully weigh the risks versus their own unique investment profiles before making any investment decisions.  Better yet, just hire us!  

Also please note that Lumen Capital Management has made investment in certain foreign related ETFs on behalf of its clients and in personal accounts in the past month.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Besides the DEM, VGK and related S&P 500 we are long the ETFs shown in the above performance chart in both client and personal accounts with the exception of ILF.  Again these positions can change at anytime without notice.  Positions can vary between clients based on several factors including length of time investing with us and a clients risk/reward profile.

Oh and one last thing.  Gundlach also discussed yesterday on CNBC the myth of passive investing.  We'll come back to that subject at another time.

Back Thursday.