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Profit Down Under By Thomas Fischer, Editor of Currency Cross Trader Dear Sovereign Investor,
Emerging markets took a beating this year as investors around the world streamed into established equity markets that have been surging consistently to new highs.
The S&P 500 has climbed more than 15% this year, and Japan's Nikkei skyrocketed by 48%. At the same time, even Germany, the economic engine of a struggling Europe, saw its stock market jump 18%.
Any way you slice it, these are great annual returns.
However, emerging markets are down 5% overall. The herd has spoken: Developed markets were where the money was in 2013. But I fully expect that trend won't last. The tables will almost certainly turn.
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If we follow the money, we see that emerging-market investors sold their stocks to chase the developed markets higher. The results of this are the big gains we've witnessed in the Dow, S&P and the Nikkei Index. However, now that the Fed has begun to taper, a lot of investors see a top in the major indexes. The herd thinking goes like this: If interest rates rise, why do I need to risk my money in the fickle equity markets? Investors can simply put some, or all, of their investment cash in the bank and collect the guaranteed interest. Waiting for the Big Sell-Off What's more, quarterly earnings start coming out in January and that means volatility. Investors don't want to put their gains at risk. There's going to be a sell-off in the big indexes — but that doesn't mean the savvy investor needs to put all his money into low interest savings or CDs to avoid the inevitable volatility.
One thing I know about herds is that if you follow them, you get dust. One emerging-market currency I like is the New Zealand dollar (NZD). The NZD — the kiwi to traders — is coming off a pretty volatile year. As big global equity markets were making new highs this summer, the kiwi made a new low against the U.S. greenback at 0.77. But then something strange started to happen. Some investors broke away from the herd and started buying the kiwi. And they bought it all the way up to 0.85. Basically, the U.S. reported some not so great GDP and employment numbers, and the smart money moved out of big equity markets and into emerging-market currencies, such as the Kiwi. Those investors "caught the falling knife" and were handsomely rewarded for seeing value where no one else could. Time to Seek Value Elsewhere Savvy investors are seeing the Nikkei, the Dow and S&P as already fully priced into the market, the taper has begun and earnings season is coming up. It's time to seek value elsewhere. My advice here is to ignore the herd! A recent Morgan Stanley survey of wealthy clients showed that 80% favored moving at least some of their money into emerging markets in 2014. These wealthy clients are not the herd; they're thinking ahead, seeing low relative values in markets that were ignored during the U.S. rally. They correctly assume the Dow and S&P will fall early next year and they are looking to emerging markets for better values. In the coming weeks, I'll be monitoring emerging markets, looking for the inevitable upside move from value investors. When the herd is here, we'll go there. Regards,
Thomas Fischer
Editor, Currency Cross Trader
P.S. Emerging markets are going to benefit as investors take money off the table this January, and that's a great way to add diversity to your portfolio. Another way to diversify your investments is investing in weather-related stocks. For more information, click here. | 
Thomas Fischer is the editor of Currency Cross Trader and has been active in the financial industry since 1975, trading currencies both as a trader and a broker for 22 years in Copenhagen, London, Düsseldorf and Frankfurt.
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