Russia Busts... What Next?

Russian stocks have lost nearly 30% of their value since late April (as measured by the Templeton Russia Fund, see chart below).

Russia is not alone. India’s main stock market index has fallen by about 3,000 points in less than a month.  Stock markets in emerging market countries are all under attack.

RUSSIA’S CRASH... NO BOTTOM IN SIGHT

So is it time to buy?  Or is there more pain to come?  I promise I’ll answer that in just a minute.  But first, if you’ve been following our advice here inDailyWealth, you should be weathering this horrendous fall in emerging market stocks just fine. 

Here’s why:

Back on April 25th, the title of my DailyWealth essay was“Emerging Market Stocks:  Why I’m Cautious Now.”  When you compare the date of my essay to the date of Russia’s peak above, we could hardly have called it any better. 

Specifically, on April 25th, I said “the old wisdom - that just when things appear good in emerging markets is when they’re actually the most dangerous - definitely appears to be true right now.”

I then shared with you my favorite emerging markets indicator, which was pointing to terrible times ahead in emerging market stocks.  In fact, I said“my indicator is now at its most extreme level in recorded history.”

The last time my indicator flashed, in 1997, emerging market stocks lost half their value in the following 12 months. Stock markets in countries like Thailand and Indonesia lost an average of 90% of their value.  Now, my indicator is even more extreme than it was in 1997. 

I closed that day’s essay by saying, “Big investors are excited about emerging markets. But I’ve seen this movie many times before... Just when things look the most attractive is often when they’re the most risky.”

“Make sure you know where you’ll get out of your emerging market stocks (with trailing stops) when the music stops. Because the music will stop... sometime in the not-so-distant future.”

Though these stock markets have fallen dramatically, it’s not time to buy just yet.  My indicator is still in the danger zone.  So chances are good there’s more pain ahead for emerging market stocks. 

After such a big fall, some emerging market stocks sure look tempting.  Don’t bite yet.

Good investing,

Steve