MARKET COMMENT
Buying Into Suicidal Markets

By Maynard Paton (TMFMayn)
May 21, 2004

'Problems, crashes, people jumping out of windows. That's my kind of place. One guy in Thailand in the stock exchange put a gun to his head and said, "Make the market go up, or I'll shoot myself". Fantastic. That's the kind of market I want to be in.' -- Mark Mobius.

Mark Mobius, disciple of contrarian legend Sir John Templeton and president of the Templeton Emerging Market investment trust, has probably had half an eye on the Indian stock market lately. Following a surprise election result, trading was suspended twice on Monday as the Mumbai Sensex index collapsed 16%.

Though Mumbai traders may not be feeling suicidal just yet -- the Sensex has since rebounded and is only 22% off its all-time high -- the volatile nature of so-called 'emerging markets' can make for superior returns.

One classic example of the possible rewards from troubled foreign markets is Russia. In 1998, the country was plunged into economic and political crisis as the government suspended payments on domestic debt and the rouble went into freefall. It was, as Sir John would say, a 'time of maximum pessimism'. But the country subsequently recovered and, over the past five years, the Russian RTS index has rocketed 478% (in sterling terms) and is by far the best performer among Bloomberg's top sixty worldwide bourses.

But where in the world are investors jumping out of the windows now? The Philippines is one possibility, with its market down 62% in five years and 79% over ten. Argentina is another under-performer, tumbling 47% since 1999 and 58% since 1994. And perennial loser Japan, which seems to be in a life-long bear phase, is 33% and 58% lower over five and ten years respectively.

However, British investors may want to look closer to home. In the past five years, the market in Athens has reversed 42%, while Amsterdam has declined 40%. Indeed, the FTSE 100 itself has retreated 30% over this time and is the eighth worst five-year performer out of Bloomberg's top sixty. What's more, the UK's benchmark index has also been the seventh worst in the last twelve months, having lagged just about every emerging market going.

For contrarians then, the UK market is perhaps as good a bet as any for recovery. Don't forget, with many FTSE 100 members generating a substantial proportion of their profits from overseas, blue-chip investors are inherently exposed to a spread of faster-growing economies, but shouldn't suffer the associated political and economic risks full-on. Of course, the FTSE will never produce the mega-returns seen in Russia, but hopefully it'll never prompt guns to be waved on City trading floors, either!

Where next? Buy The UK Market | Buy Contrarian Shares With The Motley Fool's Value Investor Newsletter (with free 30-day trial!) | Mark Mobius On Emerging Markets | Sir John Templeton