by Charlie Bilello | March 17, 2014 3:36 pm
In June of 2013, the Egyptian stock market was declining precipitously. That’s a nice way of saying that it was crashing.
On June 24th, the Market Vectors Egypt Index (EGPT) was down over 28% on the year and over 50% from a few years earlier (see chart below). Needless to say, investors were expecting and betting on bad things to happen in Egypt.
No one was a buyer of Egyptian equities.
In one sense, these market participants were correct, because on June 30th of 2013, a mass revolt erupted in Egypt. Millions of protesters took to the streets, demanding the immediate resignation of President Mohamed Morsi. The protests escalated and tens of deaths were reported. Still, Morsi refused to step down. A few days later, on July 3rd, Egyptian army General Abdel Fattah el-Sisi removed President Morsi from power and suspended the Egyptian constitution.
What happened to Egyptian stocks during these events, you ask?
Surely, they must have declined further as stocks are supposed to go down when bad news is reported. However, this was not what happened. In fact, the opposite occurred with Egyptian stocks actually starting to advance (see chart below). This advance would continue to shock market participants for the remainder of the year with the Egyptian market actually finishing the year in positive territory. The trend has continued thus far in 2014, with Egyptian stocks outperforming much of the world.
This year, we have another Egypt situation though on a much larger scale. I’m referring of course to the events in Ukraine and investor concern about the negative effects it will have on Russia.
To put it bluntly, the Russian stock market is crashing due to these concerns, with the Market Vectors Russia ETF (RSX) down over 27% this year and nearly 50% from its peak a few years ago (see chart below).
You would be hard pressed to find a good reason to buy Russia right here. All the pundits on T.V. and twitter are telling you Russia is going lower as disaster is a certain outcome. Sure Russian stocks are cheap, they say, but they are cheap for a reason.
It is hard to argue with them except from the standpoint of history. History has shown us that the strongest rallies begin when there is not a single reason to buy. They don’t begin when the streets are paved with gold but as Baron Rothschild is quoted as saying, when there is “blood in the streets.”
There is most definitely blood in the streets of Ukraine and Russia today and that scares most investors to their core. At the same time, that is precisely why we will likely be looking back a year from now with Russian stocks at much higher levels than today.
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