Be Greedy When Others Are Fearful: Start To Dollar Cost Into Russian and Chinese Equities

In 2009, after the biggest plunge of stocks that the world has ever seen since WWII, nobody believed in stocks anymore, especially EM stocks because the MSCI EM fell by over 60% from the peak in Nov 2007 to the bottom in Mar 2009. 2009 turned out to be one of the best year for MSCI EM as it registered over 150% of return that year. In 2010, confidence slowly returned to stocks but many were still sceptical, MSCI EM continued their ascent. By 2011, every neighbour and her dog was into MSCI EM. It proved to be the peak. Till today, MSCI EM is around 18% below the peak in May 2011. The four biggest components of MSCI EM are in order of China, India, Brazil and Russia. That's right, it's the now infamous BRIC countries. Other peripherals like Turkey and South Africa also account for a sizeable weight but still pale in comparison to the Great BRIC.

The MSCI AXJ peaked in Nov 2010, six months earlier than its EM counterpart. That was because China, which peaked at that time, was the runaway heaviest weight in the index. It is now around 11% below the peak.

The HSCEI also peaked in Nov 2010 and is now 26% below the peak. It has been in bear territory for almost three years. the SHCOMP peaked in Aug 2009 and is today some 34% below the peak. China is the biggest culprit because SENSEX, the second biggest component of the MSCI AXJ remained sideways since May 2010. SHCOMP's decline was due to the misguided policy of the Chinese government, using central command policies that are not market driven to pump prime the economy. The order to increase credit in late 2008 resulted in a lot of misallocated resources, and widespread corruption. Today, China is in danger of facing a credit bubble much like what the rest of Asia went through in 1997 and the western world went through in 2008.

However, today, the SHCOMP and HSCEI's valuations are at record lows, whether you look at PE or Price to Book. The technicals are turning positive too. What is needed now is catalyst to boost the index. furthermore, I detect a peak in pessimism about EM stocks. Be Greedy When Others Are Fearful. It is time to dollar cost into Chinese equities.

The MICEX Index peaked in Apr 2011 and is today 22% below the peak. It too is bottoming up. Valuations of Russian stocks are even cheaper, at around 5 - 6x PE.

I say it again, "Be Greedy When Others Are Fearful.... Be Fearful When Others Are Greedy."