Market Digest – Week Ending 11/27
Markets were quiet in a short holiday week. US stocks were flattish. Bonds rose modestly in a flight to safety after Turkey downed a Russian warplane. International stocks were down about 1%, largely due to strength in the dollar which closed the week at $1.06, the lowest since 2003. Gold in dollar terms reached a six year low.
S&P 500: 2,090 (+0.1%)
FTSE All-World ex-US: (-0.8%)
US 10 Year Treasury Yield: 2.22% (-0.04%)
Gold: $1,059 (-1.7%)
USD/EUR: $1.060 (-0.4%)
• Monday – Pfizer and Allergan announced a $160 billion merger, the largest ever “inversion” designed to reincorporate outside of the US in order to lower corporate taxes.
• Monday – NATO member Turkey shot down a Russian Warplane. Russia threatened economic sanctions in return.
• Tuesday – Q3 US GDP growth was updated to 2.1%, up from a previous estimate of 1.5%.
• Wednesday – Billionaire CEO of Brazil’s Groupo BTG Pactual, Brazil’s largest independent investment bank, was arrested on corruption charges. Shares dropped 12%.
• Friday – Disney reported a 3% drop in ESPN subscribers, likely signaling an overall drop in traditional cable usage. Shares fell
• Friday – China launched investigations into three major brokerage firms over activities during market declines earlier this year, prompting a 5% drop in the Chinese market.
It was a rough week for emerging markets stocks. In Brazil, the CEO of the largest independent investment bank and a high ranking ruling party senator were arrested as part of an investigation into the massive corruption scandal at state controlled oil company Petrobras. In China, stocks fell 5.5% on Friday after investigations into three major brokerage firms were announced.
The negative reaction in China results from uncertainty about who or what is being targeted. When investors see others being jailed for their activities in the stock market, the natural reaction is to not want to participate at all.
In emerging markets, corruption is always part of the equation. It is big and rampant. This has always been the case. It should be a factor in considering emerging markets investments, but it shouldn’t deter one from investing in these markets altogether. Headlines about corruption are almost always a short term negative, but may prove to be a long term positive. China’s crackdown is real. Until it plays out it creates uncertainty, but there is a chance the overall level of corruption will drop in the long-term, which would be a huge positive for shareholders. The same may prove true in Brazil. There are fewer signs of hope in major markets like Russia and India, but most likely the cost of corruption can only get better, not worse.
Emerging markets stocks are down roughly 13% for the year. They are down a similar amount over the last five years, in stark contrast to the S&P 500 which has nearly doubled in the period. Most of the losses are due to slowing economies and a crash in commodities prices (many are commodities exporters). Fears of rising rates in the US are also putting pressure on emerging markets currencies.
Emerging markets stocks are more volatile than developed markets stocks, and they tend to have a modestly higher long term return as a result. Right now, they look cheap on a relative basis. There is no way to know when this period of massive underperformance will end, but at some point emerging markets stocks once again will be the envy of the world.
From all of us at Personal Capital, we wish you a very happy Thanksgiving weekend.
Craig Birk, CFP®
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