Euro Zone Stocks Have Still Reached Their Previous Peaks

Stocks in the Euro Zone are still lagging behind in terms of recovering previous losses. For instance, the benchmark Euro Stoxx 50 index has still not reached the peak attained before the Global Financial Crisis of 2008-09 as shown in the chart below. In addition, the record high of 5,405 before the dot com bust still remains the highest peak.

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Source: Stoxx

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Black Monday Was Just a Blip in the Long Run

On 19 October 1987 the Dow Jones fell an astonishing 22.6% making it the worst one day fall in its history. That day has gone into the history books as the “Black Monday”.

Though Black Monday was a terrible day for equity investors it was just a blip in the long term returns of the US equity market. The following chart shows the long-term returns of the MSCI USA Index from 1970 thru September 2017:

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MSCI USA: 1970-2017 and the blip that was Black Monday

Source: Black Monday 30 years on: how it happened and what we can learn by David Brett, Schroders

From David’s above article:

The chart above (edited) reflects the fluctuations in the US stockmarket since 1970. It illustrates how Black Monday registered as barely a blip in the long term and how resilient stocks have been over the last 47 years.

Those who invested after Black Monday would have seen $100 turned into $1,135 without considering the dividend income paid out. That high return was achieved despite remaining invested through the dotcom crash of 2000-03 and the global financial crisis of 2007-09.

The takeway for investors is that in the long-run even scary one-day plunges in markets may become inconsequential in terms of returns. When markets take dramatic turns like that Monday 30 years ago investors need to remain calm and not sell out.  Instead of panicking investors have to focus on their long-term goal and simply ride out the storm. The above example shows how patient investors were rewarded after enduring the dot com and the global financial crisis of 2008-09.

US Retail is Oversatured Compared to Other Developed Countries

The US is the third largest country in the world based on land mass. With a population of around 323 million it is the third most populous country in thr world after China and India.

In terms of retail space the US has the highest amount of space per person than other major developed countries. With the explostion of online shopping many national chains are closing stores every year. According to a Credit Suisse report, about 8.640 stores are projected to be closed this year compared to 6.200 at the peak of the Global Financial Crisis(GFC).

The following chart shows the vast oversaturation in American retail:

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Source:Retail Closures on Record Pace,  Manning & Napier

The difference in retail space per capita between Germany and USA is shocking. Years of overbuilding of stores and shopping malls in the US like there is no tomorrow has lead to the death of many of these cathedrals of capitalism in recent years. Abandoned malls dot the country from small towns to mid and large cities. Over the next decade or so many more thousands of stores and hundreds of malls will be shutdown and converted to space for some other useful purpose.



AllianceBernstein: Earnings Drive Emerging Market Stocks

Emerging market stocks have soared this year after years of under performance. For example, while th S&P 500 is up just over 14% YTD Brazil’s Bovespa has increased by nearly 28%.

The year-to-date returns of some of the emerging markets are shown below:

India’s Bombay Sensex: 21.8%
Chile’s Santiago IPSA: 28.6%
Argentina’s Merval: 60.4%

Other major emerging markets such as China and Russia are up by about 10%.

I have written many times before that economic growth does not neecessarily lead to equity market in emerging markets. A recent article at AllianceBernstein noted that earnings growth is a key factor driving emerging market equities. From the article:

Emerging market (EM) equities have had a great run recently. But don’t buy EM stocks indiscriminately. Focus on company earnings over macroeconomic trends to find stocks that have stronger return potential with reduced risk.

The MSCI Emerging Markets Index has surged nearly 42% in just 21 months. That’s almost double the performance of the MSCI World Index of developed market stocks. After several tough years, EM are finally living up to expectations and unleashing powerful pent-up return potential.

What’s behind the strong momentum? It’s really all about earnings, and less about macroeconomics. In fact, contrary to conventional wisdom, the correlation between GDP growth and stock performance in EM is close to zero. On the other hand, the relationship between earnings and stock price is much more closely linked (Display).

That makes sense. Equity investors are ultimately investing in companies, not countries. And at the moment, the earnings outlook for companies in the developing world is robust, with consensus expectations projecting a 30% increase over the next two years.

Source: Follow the Earnings to Emerging Equity Stars by Sammy Suzuki, AllianceBernstein, October 10, 2017

The key takeaway for investors is that earnings matter in emerging markets also. More specifically it is not wise to invest in an emerging country simply because the economy is growing. It is very important to pay attention to earnings.

Related ETFs:

  • iShares MSCI Brazil Index (EWZ)
  • The Global X MSCI Argentina ETF (ARGT)
  • WisdomTree India Earnings (EPI)
  • iShares S&P India Nifty 50 Index (INDY)
  • PowerShares India (PIN)

Disclosure: No Positions