By Nicholas A. Vardy, CFA
Investing is a harsh taskmaster. Each day, cold, hard numbers tell you what you got right and what you got wrong. Place a big bet on country's stock market, and you generate big gains. You start approaching the world with the misplaced self confidence that can end up costing people a lot of money.
Of course, you can be right for all sorts of reasons.
Sometimes, you make big gains by betting on a market that has been beaten down too far, too fast. As investing legend John Templeton put, you should invest only in the countries where "the outlook was always the worst."
Other times, a country's stock-market strength is based purely on momentum and "hot money" flowing into that market.
Finally, sometimes a country's strong stock market performance can just leave you scratching your head. You struggle for an explanation, even with the benefit of 20/20 hindsight.
I recently saw examples of all three cases as I surveyed the 46 global stock markets I monitor daily at my firm, Global Guru Capital.
First place: Russia — an ‘I told you so’ moment
So, what did my latest survey of top-performing global markets reveal?
First, it confirmed that my bullish call in July 2014 on Russian stocks — basically, to buy when there is blood in the street — is set to pay off big time. Year-to-date, the Market Vectors Russia ETF /zigman2/quotes/200464876/composite RSX -1.54% is the best-performing global equity market with a total return of 35.75%.
Plunging oil prices, a collapsing ruble and Western economic sanctions as reprisals for the annexation of Crimea quickly made the Russian equity market an investment pariah. And as sure as day follows night, an extremely bearish article on Russia as a wounded bear appeared on the cover of The Economist magazine in November 2014.That's also when I wrote about how this epic bad press was a signal to get back into Russian equities.
The pendulum had swung against Russian stocks way too far. It was time to grit your teeth and buy Russia.
Second place: China — a classic stock-market bubble
The second-best-performing market in 2015 is the once-again trendy China. The iShares China Large-Cap ETF /zigman2/quotes/208670743/composite FXI +1.01% the benchmark fund for China, has delivered a total return of 24.58% year to date (YTD).
I say once-again trendy because a few years back, no market was hotter than China, when endless promises of making your fortune in the "China Miracle" once filled your email inbox. Of course, everyone "knew" the Chinese stock bubble was destined to burst. Sadly, once the music in this game of musical chairs stopped, many investors couldn't find a seat and saw their gains in China evaporate.
But as economist John Kenneth Galbraith observed, "The financial memory is very short."
The Chinese stock-market bubble is back. In a sure sign of a stock-market mania, Chinese small investors have started taking second mortgages to funnel capital into the Chinese stock market. More and more Chinese are scrambling to get in on the action, as 1.68 million new brokerage accounts were opened in the week ended April 10.
A recent analysis of Chinese valuations in The Financial Times shows just how frothy this bubble has become. Just compare the forward price/earnings (P/E) ratios, in the following markets: