Brazil Crashes Moments After All the Experts Say "Buy"

Emerging markets are generally not appropriate investments for most. Certain markets may work for trades here and there, but the category as an investment class is wholly inappropriate for non-institutional investors who want to maintain their lifestyle, home, etc. I have maintained for years that anyone (investment advisor, etc.) who tells you to buy emerging markets (now fashionably called “EM”) is someone to run, not to walk, away from.

Plenty of people got clobbered in 1998 when emerging markets became a contagion. They may never become a contagion again, but each market bears its own separate risks. Certain markets could be interesting, but you need to know a specific market especially well before committing any capital to it. Anyone who has done business in a place like Russia, Argentina, Turkey or Thailand knows that these countries lack the political and economic climate in which capital can grow over time. Most importantly, most of these countries lack a law-based state that would enable their stocks to be anything other than a very short-term trade.

For these reasons, I was surprised when Jeffrey Gundlach, the Chief Executive and CIO of Doubleline Capital, told the Sohn Conference in New York last week that his trade going forward in 2017 is to be long emerging markets and short the US market. Gundlach’s primary reason is one of comparative valuation with his EM values showing that their markets are trading at half of the now rich US valuations. In particular, Gundlach promoted a leveraged trade on the iShares MSCI I-Shares Emerging Markets Fund.

Gundlach, of course, is an extraordinary investor who has been amazingly successful in his bond funds. I don’t know whether he has any background in analyzing or doing business in any emerging markets. And, while there may be a short-term opportunity in a particular emerging market, no long-term investor should have a blanket long position (much less a leveraged long position) in EM generally. And, nobody should have a 50%, 20% or even 10% general allocations to a general emerging markets fund.

What surprised me even more than Gundlach’s position was the way that it prompted many well-meaning and very smart investors to conclude that Brazil would be the great market of 2017. I am not talking only about the screaming and ridiculous know-nothing crowd on CNBC; there were very smart people who heard Gundlach’s speech and determined that because a reasonable person would not be investing now in Turkey or Russia, they should concentrate their investment in Brazil.

Those people lost 30% of their money between the time they went to sleep last night and the time that they woke up this morning.

Takeaway: Don’t ever follow the experts who do not really know emerging markets, or the specific EM economy about which they profess to have knowledge, into having a meaningful allocation in this so-called sector.

Editor’s Note: The author made a killing investing in Argentina over the last 14 months. But, he invested a very small amount of his portfolio, did it without leverage, and is out now.