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Saturday, May 16, 2009

Behavioral Finance in action

In an appropriately titled blog entry(see below) the WSJ's market beat blog notes investors (surprise) chasing an asset class that has already had a big run up and (surprise again) a new even more risky etf to chase that asset class. A broad emerging market not enough bank for you ? a single country broad market index not good enough for ? someone is happy to offer risk on steroids in this case small cap Brazilian stocks etf. We'll pass on this one. In fact we would be more inclined to rebalance our emerging markets holding by selling off a bit of our holdings.

I'm surprised the 2x emerging market etf hasn't come to market yet but I am sure it is in the works.

Brazil and overall emerging etf charts are at the top of the page. From the WSJ

Watch for Falling BRICs.Emerging-market stocks have returned to life — but how long can it last?

MSCI’s emerging-market index is up about 23% this year, down from year-to-date gains of about 28% last Friday. Investors have poured into emerging-market stocks and currencies as they redevelop a taste for risk. Brazil is one case in point — lately, run-ups there have been so sharp that central banker Henrique Meirelles said recently that an excess of optimism could be dangerous, and lead to disappointment at the first negative number.

Brazil’s Bovespa stock index is up about 32% so far this year. Yesterday, Van Eck Global launched an exchange-traded fund of Brazilian small-cap stocks, an investment play on Brazil’s growing consumer class. The ETF includes shares of domestically focused companies — a rental car company, retailers, builders — rather than commodities and materials bets, which hinge on exports.

The ETF was up about 1% in trading on Friday, at around $24.70. Thursday was its first day of trade.

An assumption of higher long-term domestic growth has driven much of the recent ride in emerging markets. For gains to continue over the longer haul, company earnings will have to rebound, says David Semple, director, international equity, at Van Eck. Most emerging markets now appear “fully valued” on a forward basis, but earnings should also be troughing, he says. Rising earnings and estimates would presumably keep valuations attractive going forward, helping the rally continue.

Some investors “have been caught napping” by the recent bounce, Semple adds. Many “were defensive going into this, but I suspect people are scrambling to buy on dips.”

Over the longer term, gains could wither, he adds, if some exogenous risks occur — lower long-term growth in developed markets could hurt emerging markets, as could falling U.S. and European demand

Brazil etf chart is at the top of the page, emerging markets underneath both ytd

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