My Trading > My Trading Journal > December 28, 2013

My Trading Journal

December 28, 2013

6:30 pm (PST)

Here is a nice quick article in Barron's about the high economic growth rate in Africa. I find these kinds of articles particularly useful because it is somewhat difficult to keep an eye on the economies and stock markets of foreign countries (unless you specialize in international investing). This difficultly is compounded by the fact that there is no resource where you can check up on quick-and-dirty statistics about the economic fundamentals of foreign countries (that I am aware of anyway).

But the above article only talks about the fundamentals. You also need to take a look at the charts to get the technical picture. For example, if the market is up 100% for the year-to-date, then the market may have already priced in this attractive growth. We'll use the African ETF EZA (iShares MSCI South Africa Index) as the vehicle to analyze this trade idea.

In the chart below, you can see that the market is mostly attractive, for a few reasons:

  • The ETF has been in a trading range for 4 years, between 55 - 78.
  • It is in the bottom half of this trading range.
  • Longer-term. Although the ETF is up a lot from its 2008 low, it is still at the same price as it was back in 2006.

In order to get the full picture, you also need to see what the P/E ratio is in order to see if the valuation ia attractive. Most times, I don't even do this, for a couple of reasons. Firstly, valuation (or earnings) statistics are not readily available for countries as a whole. And secondly, whenever you are presented with an economy that is growing very quickly but has a stock market that is under-performing (by trading in a very long trading range, or better yet, selling at multi-year lows), you can bet on that market going up over the intermediate term.

I posted a similar journal entry about the Vietnamese stock market about 2 years ago, which was in a somewhat similar position. This was the ideal situation where you are buying an economy with a high growth rate that is selling at multi-year lows. Although the ideal situation would be for the African stock market to drop 20% or so and trade at multi-year lows, you can still buy it today without the market being overbought at all.

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