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The US stock market, the strength of the US dollar and especially the price of oil have a huge impact on the coast of living in Ecuador.

What stock market triggers might emerge to kick off a negative spiral.  Stock markets ultimately rise and fall based on economic fundamentals.  Share prices and value fluctuate short term based on emotions.   When markets are over bought or over sold any trigger can cause a massive positive or negative shift.   A trifecta of events in the mideast could be such a trigger.

yemen

Two ancient choke points for the global economies of times past.

yemen

These choke points remain in the modern global economy.

The US stock market is very high.  History suggests that its time for a serious pull back before the next 17 year bull market begins.  How do we survive the correction so our savings are intact and can really grow in the next bull?

We’ll look at why the value in emerging stock markets offers extra opportunity in a moment.  First, let’s look at a trifecta of oil related concerns that could cause a stock sell off.  The first concern is lower oil prices.  The drop in oil and gas triggered further strength in the Western economy and a rise in the US equity market, but this drop adds unrest in the Middle East where there are numerous triggers that could signal a downwards spiral of US share prices.

The second concern is the change of power in Saudi Arabia. King Salman bin Abdulaziz Al Saud, Saudi Arabia’s new ruler, has said he will keep Oil Minister Ali Al-Naimi and continue the policy of maintaining crude output.  If this is so and the flow of oil remains unrestricted, this will help keep oil prices down.  Saudi Arabia needs oil in the $90 range to balance its budget. Current prices below $50 per barrel range have been squeezing the Saudi budget and creating tension with some members of the royal family.  King Salman is already 79 years old, and the next in line, Crown Prince Muqrin, is 69 and it’s very unclear how further succession might unfold.   This transition could pressure the price of oil.

The third part of the trifecta concern the events in Yemen which could affect oil prices even more.  Yemen is an oil producing country and its strategic position on the Bab al-Mandab strait are a cause of concern.  “Bab al-Mandab” means “Gateway of Anguish”, or “Gateway of Tears”.  These names come from ancient navigation dangers but could cause tears in the global economy now.  The strait is a strategic link between the Indian Ocean and the Mediterranean Sea, via the Red Sea and the Suez Canal.  Millions of gallons of crude oil pass through the strait every day.

An October 23, 2014 Financial Times article “Houthi expansion threatens Yemen’s strategic Bab-al-Mandab Strait” (1) by Peter Salisbury said:  “Houthi militants are expanding their presence into western Yemen around a vital maritime corridor that controls access to the Red Sea, a potential threat for some of the 8 per cent of global trade that runs through the Suez Canal.

The Bab al-Mandab strait separates the Arabian Peninsula from east Africa and links the Red Sea with the Gulf of Aden and the Indian Ocean.  Most ships using the waterway have come from, or are going to, Egypt’s Suez Canal, which connects the Red Sea with the Mediterranean and which contributes about $5bn a year to the Egyptian economy.

About 4 per cent of the global oil supply, much of it from Saudi Arabia and the other Gulf states, passes through the strait, which is 29km wide at its narrowest point.

Developments on the strait are also unnerving Saudi Arabia. Riyadh believes the Houthis are backed by Iran, and worries that its regional rival could be using its influence to disrupt Red Sea trade.  Tehran has threatened in the past to block the Straits of Hormuz, the region’s other chokepoint, through which a fifth of global oil supply passes on a daily basis.”

Yemen’s unity, law and order have been enormously stressed.  Four percent of global oil passes through the Mandab Strait.  20 percent through the Straits of Hormuz.  Iran has a growing influence over both of these choke points.  If these reports are correct, then we should watch events as they unfold in this area closely.

Should the unrest in this area restrict this amount of oil, the price of oil could skyrocket enough for investors may panic to trigger a wave of of pre-programmed algorithmic trading instructions in automated computer programs.   This could cause a sharp, sudden correction and a strong downward spiral of stock prices.

Will these triggers be pulled?  Your guess is as good as mine or anyone’s.  There is always something that we do not know, especially in Yemen now.  Ali Soufan, president of the Soufan Group, an international security firm was for years one of the FBI’s chief experts on al-Qaeda and two of its traditional power bases, Yemen and Saudi Arabia.  He was interviewed about the Yemen situation in a news.yahoo.com news article (2) and said: “It is a total mess. Anybody who can tell you they know what’s happening in Yemen and what’s going to happen in Yemen, I know one thing: They don’t know Yemen.”

Investing in situations like this calls for special attention to value. This is why we carefully follow the value analysis of Keppler Asset Management.  Here are excerpts from Michael Keppler’s quarterly good value update of global emerging equity markets.   Borrow Low-Deposit High subscribers, you can read the entire 50 page January 2105 Keppler Asset Management Emerging Market Good Value Analysis click here.

Learn how to get a multi currency update password

Recent Developments & Outlook

Emerging Markets closed out the year 2014 on a weak note. Last quarter, the MSCI Emerging Markets Total Return (TR) Index (December 1988 = 100) was flat in local currencies, but due to weak local currencies it declined 4.5 % in US dollars and 0.3 % in Euros.

In 2014, the MSCI Emerging Markets TR Index was up 5.2 % and 11.4 % in Euros.  However, again due to weak local currencies and a strong US dollar, it declined 2.2 % in US dollars.

The Euro continued its recent downtrend, giving up 4.2 % versus the US dollar last quarter and now stands at 1.2101 USD/EUR, down 12.2 % in 2014. This trend of a higher US dollar and lower local currencies has continued into January 2015.

Among the three regional indices, Asia gained 2.1 % in the last quarter, Europe, Middle East and Africa (EMEA) declined 0.9 %, and Latin America lost 6.1 %.  In 2014, Asia (+7.7 %) and EMEA (+2.8 %) were up, while Latin America declined 0.9 %. Performance is in local currencies unless mentioned otherwise.

Seven markets advanced in the fourth quarter and sixteen markets declined.  The best performing markets were Turkey (+14.4 %), China (+7.0 %) and Taiwan (+5.6 %).  Greece (-25.6 %), the United Arab Emirates (-21.6 %) and the Czech Republic (-11.2 %) performed worst last quarter.

In 2014, sixteen markets advanced and seven markets declined.  Egypt (+33.1 %), Turkey (+29.2 %) and Indonesia (+28.8 %) performed best, while Greece (-31.6 %), Russia (-12.8 %) and Hungary (-12.2 %) came in last.

There were no changes in our country ratings last quarter.  The Top Value Model Portfolio contains twelve markets — Brazil, Chile, China, Colombia, the Czech Republic, Hungary, Korea, Malaysia, Poland, Russia, Taiwan and Thailand — at equal weights.  According to our analyses, an equally-weighted combination of these markets offers the highest expectation of long-term risk-adjusted performance.

The table below shows how the Emerging Markets Top Value Model Portfolio compares to the MSCI Emerging Markets Index and to the MSCI Developed Markets Index at the end of 2014, based on selected assets and earnings valuation measures:

keppler 2015

Click on image to enlarge.

Based on our valuation and return analyses, the asset class “Emerging Markets Equities” is now undervalued by 26 % versus the MSCI World Index.  Furthermore, our Emerging Markets Top Value Model Portfolio is now undervalued by 14 % versus the MSCI Emerging Markets Index and by 37 % compared to the MSCI World Index of the developed markets.  This bodes well with regard to potential out performance over the next three to five years for the emerging markets in general and for the Emerging Markets Top Value Model Portfolio in particular.

Michael Keppler New York, January 16, 2015

Emerging markets have an extra layer of safety due the undervaluation versus world markets.   Click on the chart below to see an even greater undervaluation (over 40%) of the MSCI Emerging Markets Index versus the MSCI US Index.

Screen shot 2015-01-18 at 4.55.43 PM

The Good Value Emerging Markets have an undervaluation in the 50% range.  An easy way to diversify into good value emerging markets is with the iShares ETFs shown below.

Gary

(1) Financial Times Houthi expansion threatens Yemen’s strategic Bab al-Mandab Strait

(2) News.yahoo.com  Yemen Chaos is a boon to al-qaeda expert and former FBI agent