Low bond yields and weak stocks have had Ed Dempsey of Pension Partners cautious on the market. Beyond the election, he's waiting for signs of a fiscal cliff resolution that could be the next catalyst to get more of his investing money back to work. When the risk-on trade returns, Dempsey is ready to pounce on opportunities in one of the riskiest sectors around the globe. (See Related: Low Bond Yields Are a Big Red Flag for Equities)
"Emerging markets (EEM) all year have been hostage to this Europe collapse story, to the global macro story, and strong dollar," says Dempsey. "Emerging markets typically are the factory floor of the developed markets."
He's particularly looking at China and eyeing the iShares FTSE China 25 ETF (FXI).
"The Chinese markets have been miserable, but seem technically to be bottoming. We have brand new leadership coming, there's been a lot of talk of stimulus or other additional liquidity measures that they may do," he says. "Those liquidity measures, as we know in the past, do have an impact on very weak markets; look at our markets."
But Breakout's Jeff Macke takes the opposite view and points out that China's drag on the emerging markets may be too large to expect a collective rebound anytime soon. "China's the big dog -or dragon if you will- wagging the tail, so emerging markets aren't going anywhere without China," he says. "The data in China is murky at best, and the new leader, I don't know much about the guy."
After we dissect our own election results, this Thursday China begins its own election of the 18th congress of the Communist Party. Xi Jinping, who emerged as Hu Jintao's heir apparent in 2007, will be named chairman of the ruling party. His selection and the process of seating the other ruling members are shrouded in secrecy. Over the course of a week, the CCP will determine its next leaders, without any of China's over one billion population voting; a far cry from the voting process we're about to begin.
So if the economic data can't be trusted from a country whose leaders are selected in secrecy, is there a strong enough case for investors to get into Chinese stocks or other Emerging markets now?
"You can't make those bets. I have no idea what's going to happen there," says Macke. "How can I have any certainty at all in these high beta stocks, under the best of circumstances?"
Dempsey on the other hand is looking at price action to determine when the risk-on trade comes back. When it does, he sees a weaker U.S. dollar, quieter global macro scene, and ripe conditions for buying EM stocks.
"The Emerging markets, on a fiscal basis, are much healthier than the U.S. and Europe. They have much lower debts having gone through their problems in '98," says Dempsey. "So if you have the U.S. start to resolve the fiscal cliff and grow, then it's reasonable that you would start to see China reflect that. This is a market that has gone nowhere and a market that may get stimulus into it."