By Chris Igou, analyst, True Wealth
The pandemic has shaken investors…
The coronavirus has made its way all around the globe. The big question – how long it will last – remains unanswered. And the uncertainty is causing investors to flee stock markets in all parts of the world.
Specifically, investors are getting out of riskier assets like emerging markets. These economies aren’t as strong as those of developed nations. And in many ways, they’re less prepared for today’s pandemic.
Investors want nothing to do with emerging markets as a result. Shares outstanding for one of the larger emerging market funds have fallen to a 12-year low.
Ultimately, this panic-selling will end. We’ll reach a point when everyone has already sold. And that will create a major buying opportunity… But you’ll want to wait on the uptrend before acting.
Let me explain…
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Asset prices bottom during times of maximum fear… not when folks are still willing to take on risk in the stock market.
This fear is spreading into emerging markets. Investors are going “risk off” when it comes to these still-developing countries.
We can see this through shares outstanding for the iShares MSCI Emerging Markets Fund (EEM)…
Funds like EEM can create and liquidate shares based on demand. If demand is increasing, EEM will increase the share count. And if investors aren’t interested, it will reduce the number of shares.
Recently, shares outstanding fell to their lowest level since 2008. Check it out…
EEM’s shares outstanding hit new lows in March. Investors are scared… And they are heading for the exits.
Now, this kind of panic-selling tends to lead to great buying opportunities. And that’s true if we look at other bottoms in EEM’s shares outstanding. The most recent example of this was in 2016…
EEM fell more than 30% from late April 2015 into February 2016. Meanwhile, investors fled… driving shares outstanding down 22%.
Once investors completely threw in the towel – and only then – EEM was able to bottom.
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From mid-February 2016 to late January 2018, emerging markets took off for an 80% move higher. Investors realized the world wasn’t ending and bought back into these riskier markets.
Sure, shares outstanding can always fall lower from here. But with this sentiment measure at multiyear lows, a bottom is likely closer than you think.
That doesn’t mean it’s time to buy, though. While the opportunity setting up is likely a good one, you’ll want to wait for the uptrend to return before putting money to work.
Emerging market stocks have begun to move higher over the last couple of weeks. But it’s not enough to call a new uptrend yet.
So for now, keep a close eye on this sector. Investors are scared… And that means a major buying opportunity is right around the corner.