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Brian Belski: ‘There’s One Fundamental Principle That Has Escaped Market Logic’ (BMO Capital Markets)
The emerging market stress we’ve seen recently has dampened some optimism on U.S. stocks. This is because “many investors are worried that any prolonged emerging market weakness will be a harbinger for global economic struggles and particularly damaging for US stock performance,” writes Brian Belski at BMO Capital Markets. “…We strongly disagree with the notion that higher US stock prices require emerging market participation.”
This is in part because the emerging market trend began closer to the end of October and U.S. economic data is “headed in the right direction,” and lower commodity prices are good for U.S. consumers. But there’s more to it than that.
“One fundamental principle that has seemingly escaped market logic from time to time is that index price and EPS levels tend to move very closely together over time. Since 1960, S&P 500 EPS and price levels have exhibited a nearly perfect 0.95 correlation. So while the debate regarding the impact of emerging market weakness on US economic growth is likely to persist, the current and anticipated strength in corporate earnings should support stock prices at current levels.”
Index Funds Trounced Active Funds Last Year (Investment News)
U.S. investors put $US115 billion into index mutual funds in 2013, according to data compiled by the Investment Company Institute. This trounced the $US38.3 billion that investors put into actively managed mutual funds. ETFs pulled in a whopping $US180 billion.
Emerging Markets See Massive Outflows (Societe Generale)
Amid the rout in emerging markets this past week, investors spilled out of the region. The EPFR data shows that investors pulled $US6.3 billion out of emerging market equity funds and $US2.7 billion from emerging market debt funds. This was the biggest weekly outflow since August 2011. “EM outflows have only just started,” says Alain Bokobza, head of strategy at Société Générale. “Given the exceptionally strong link between EM equity performance and flows, we think it plausible that funds are currently withdrawing double that from EM equity.”
Fees Should Be One Of The Top Factors In Picking A Manager (Pragmatic Capitalism)
Cullen Roche at Pragmatic Capitalism thinks every investor should burn John Bogle’s message on fees into their brains. Quoting from a letter from the CFA Institute and John Bogle: “If “active” and “passive” management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required. . . .”
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