Over the past few weeks, emerging markets have taken a hit. Currencies from the Russian ruble and the Thai baht to the Brazilian real have fallen sharply against the U.S. dollar.

Stock markets from Mexico and Asia to South Africa have also taken a nosedive, with the CBOE Emerging Market ETF losing as much as 24 percent of its value since the end of January.

As a result, everyone is now expecting another emerging market crisis, one they say will throw the entire globe into financial panic.

I disagree. 100 percent. The reasons are simple:

First, at its root, past emerging market crises were largely the result of large external debts, little or no foreign exchange reserves, very weak economic growth, intentional currency depreciation, and corporate and bank failures.

Most of those forces aren’t present today. Most emerging markets have reduced their external debts, which are now far less a percentage of gross domestic product (GDP) than they are in the developed countries of Europe and the United States.

In addition, most emerging market economies now have healthy foreign exchange reserves, even after the recent bout of selling and capital outflows.

As to currency depreciation, naturally, there’s been some of that. But it’s entirely different from the currency collapses of the last emerging market crisis.

Most emerging market currencies now float. During the last crisis, most currencies were pegged to the dollar and were seriously overvalued. So when emerging markets could no longer defend the pegs, naturally, massive devaluations occurred.

Second, most emerging market stock markets have already experienced rather large setbacks, anticipating the current market turbulence in the developed markets.

As a result, key equity markets in China, Brazil, Vietnam, India, Indonesia, Malaysia and even Thailand are bouncing along the bottom, forming long-term support levels, from which they can vault higher.

In fact, the MSCI Emerging Markets Index is trading at roughly 11 times reported earnings — a 40 percent discount versus the MSCI World Index, according to recent data from Bloomberg. That’s the widest gap since October 2008, which indicates emerging markets are undervalued.

Meanwhile, the equity markets of the U.S. and especially Europe, are largely overvalued and in topping formations.

Third, most emerging countries have budget surpluses and trade surpluses. In addition, their foreign currency debt as a percentage of GDP is way below levels seen during the emerging market crisis of 1997-98.

According to the most recent data, for instance, Brazil’s foreign currency debt as a percentage of GDP has fallen from 26 percent in 1996 to 17 percent today.

Indonesia’s, from 30 percent to 20 percent. Thailand’s, from 51 percent to 19 percent. Russia’s, from 19 percent to 13 percent.

This is not the kind of foreign currency debts that are indicative of a full-blown crisis, especially given the fact that in general, emerging market economies have far healthier balance sheets than the Western developed economies of the U.S and Europe.

Another important consideration: In past emerging market crises, the U.S. dollar soared against all currencies. That is not happening today. Indeed, the U.S. dollar remains weak against the euro, the Swiss franc, the British pound and even against the stronger Norwegian currencies.

Bottom line: Though there have certainly been capital outflows out of emerging markets, I do not see an emerging market crisis on the horizon.

Instead, I see buying opportunities shaping up.

I particularly like Singapore and believe it or not, Thailand. Singapore is forming a nice bottom, while in Thailand, even in the midst of its political crisis, the Thai Set has held major monthly support at the 1271 level.

Lastly, there’s another key market that I watch that often signals an emerging market crisis in advance: Gold. Yes, gold has rallied. But on my systems, gold has not even generated a weekly buy signal yet, nor a monthly buy signal.

In addition, the recent gold rally occurred with declining volume, and declining open interest in the futures market. That, and a host of other indicators I watch, tell me that gold’s recent rally is a bear market rally, and not the start of a new bull market.

If we were truly seeing an emerging market crisis, gold would be performing better.

Overall, market volatility in nearly all asset classes around the world will certainly be rising in the months ahead, but not because of the emerging markets. Instead, it will be due to what’s happening in the Western world, especially Europe.

Make no mistake about it: Though it may not seem that Europe is the problem, I can assure you it is. Just look at what’s happening in the Ukraine, where a full-blown civil war has broken out.

Europe is sinking deeper and deeper into a depression. Unemployment continues to rise, banks in Europe are getting weaker and weaker, and the strength in the euro is not a sign of health. Rather, it’s a sign of severe deflation taking root in Europe, a force that will eventually cause Europe to meltdown.

I urge all investors to stay out of European equity and bond markets. That’s where the real crisis is. When everyone begins to realize it, capital outflows from emerging markets will turn into capital inflows.

Stay safe right now. Several markets are reaching critical turning points and once the trends clear up, there will be wonderful trading opportunities.

Best wishes,

Larry

– See more at: http://www.swingtradingdaily.com/2014/02/24/emerging-market-crisis-not-likely/#sthash.rQF5Wnkb.dpuf

Market Buzz – 13 Day Rally for the TSX Closes in on All Time Record

Ed Note: Scroll down for KeyStone’s analysis of stocks to buy. Be sure to focus on the risk category of each recommendation, which is spelled out by Ryan in each recommendation from Small-Cap, High Growth that can Produce Big Gains thru more conservative undervalued Dividend Paying Growth Opportunities. 

The TSX index closed the week on Friday at 14,206 points capping off 13 straight days of gains. Not only is this a feat not seen since January 1985 but if the market posts another positive session on Monday, it will actually set an all-time record.

It will be interesting to see how the market reacts Monday and whether or not investors will pay any heed to the potential record setting event. Will we see unusual volume and price activity or nothing out of the ordinary at all? Ultimately, setting a record for consecutive days of gains is pretty much irrelevant to a fundamental investor and outright annoying to a value investor. But what this does say is that investor sentiment has been particularly positive in the recent weeks and perhaps we should be on guard for a little return to reality.

When we look at the Canadian market over the last 3 years, we have seen a pretty consistent pattern. Investor sentiment has been strong in the opening months of the calendar year. More often than not this is the case as interest in the stock market is generally strongest (although not always) between January and April/May. But in each of the last 3 years, we have seen a noticeable reversal in sentiment that runs from mid-Spring to well into the summer. Each of the last 3 years has born witness its own cause for the volatility it produced. In 2011, it was concerns about the U.S. economy, its fiscal situation and persistent unemployment. In 2012, the fear was centered on Europe, with the collapsing debt structures of the PIGS (Portugal, Italy, Greece, and Spain) and the possibility of the contagion crushing, what was a fragile recovery in North America and the rest of the world. Last year (which ended spectacularly strong), it was rising interest rates which while indicating that a global economic recovery was in motion, also hampered the market performance of a number of important defensive industries which had lead the market recovery from the trough of the crash and were perceived as shelters of safety. Whatever the reason, investors have been quick to flip the switch from extreme optimism to pessimism and back again without a moment to waste.

When we try to make sense of all this we should take to heart a very important fact. Investors who bought into the hype and sold into the fear have suffered whereas those that have remained level headed in the face of volatility have actually had a great ride over the past several years. Although 2013 generated double-digit returns, this has resoundingly been a stock pickers market since immediately after the crash of 2008 and we expect this to continue. We would never analyze the trading patterns from recent years to produce a seasonal investing strategy as the best-in-bread stocks do not necessarily follow these market fluctuations. But what we can gather from these patterns is that overall investor sentiment has been a horrible guide for anyone looking to time the market (unless you are a contrarian). Intelligent and successful investors will assess individual stocks based on their own merits, they will analyze fundamentals such as financial position, growth, earnings, and cash flow (or have a good advisor do it for them – www.keystocks.com) and will refrain from paying too high a price for a stock no matter how much they like the underlying company. If one absolutely must incorporate some kind of market based trading strategy then our advice would be to center it around this…. “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” (Warren Buffett). 

KeyStone’s Latest Reports Section

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CASH RICH CANADIAN BIOTECH POSTS STRONG CASH FLOW GROWTH WITH ATTRACTIVE VALUATIONS RELATIVE TO PEERS – BUY (FOCUS BUY)

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EXTRUSION & AUTOMOTIVE MANUFACTURER REPORTS SOLID Q1 2014, ACCRETIVE ACQUISITION ADDS TO GROWTH, DIVIDEND INCREASED FOR 4TH CONSECUTIVE YEAR – LONG-TERM BUY RATING MAINTAINED

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REITERATE SPEC BUY (FOCUS BUY LIST) ON TOP INTERNATIONAL LIGHT OIL PRODUCER FOLLOWING STRONG OPERATIONAL UPDATE, PRODUCTION INCREASE AND 53% SHARE GAINS

Now Emerging Markets….

By early March “the US will be in the 2nd longest bull market of the last 80 years,” and as Marc Faber warns, “usually, these long bull markets end badly.” Simply put, The Gloom, Boom, & Doom Report publisher notes “it’s too late to buy US stocks,” warning of previous major declines like 1987, 2000, and 2007. “It’s not an opportune time” to buy US stocks but while it might be too early to buy some of the beaten-down emerging markets at these levels, Faber believes investors can make money in the longer-term – “I think I can make the case that over the next five to 10 years, I will make more money by buying now in the emerging economies then in the U.S.”

Also:

Marc Faber explains what could Crash Stocks in 2014