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Geopolitical Warning: Should You Sell or Short Emerging Markets in 2016?

Huge outflows are coming from emerging markets. Follow the money.

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As an investor with over twenty years of experience, I have to confess that investing internationally still makes me nervous.

Globe emerging markets eemPart of the reason is that rules are different overseas, and I am more comfortable understanding the laws of how businesses can operate here than working with unfamiliar territories. With the exception of Canada, I could not tell you much about the ins and outs of securities laws overseas, and that makes me nervous.

While I’m sure there are many fabulous international companies that I’ve never heard of, it is difficult for me to assess too many of them because so much of my investing style relies on an understanding of human psychology.

Some of that comes down to cultural differences. It is why, for example, I doubt Starbucks (SBUX) will be successful in Italy. I happened to have been in Italy and know consumer behavior with coffee and cafés. That’s unusual.

Pundits say that emerging markets are the place to be, and they will provide lots of opportunity for growth going forward.

That may be true, but I’ve got other concerns.

One of the other problems I have with international markets is that there are always political crosscurrents I have no knowledge of that can affect stocks. That’s why, to be safe, when I do invest internationally, it’s usually only via ETFs.

International ETFs to Short

Now we have bigger problems in international markets, which makes me want to consider shorting them. The first is financial and the second is political.

As we know, Greece and Cyprus have blown up. So have Ireland and Spain and Portugal. There are several countries that are in big trouble on a debt-to-GDP basis. Singapore is at 98%, India at 61%, Hungary at 86%, Brazil at 64% and Japan is so far over 200% I don’t know where it stops. Emerging market corporate debt is on a big upward trajectory.

Eventually, it’s going to blow up, and I don’t want to be invested when it does. So I would sell or short SPDR S&P Emerging Markets Small Cap ETF (EWX). While it is very diversified, it is diversified among all the worst countries with debt issues. It’s also heavy on small-cap companies, which are all the more subject to volatility.

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