Contrarians Beware: Putin May Mark the Top of Emerging Markets

IS VLADIMIR PUTIN THE NEW JEFF BEZOS?

The Russian president clearly won't be running an online retailer when his term is up next year, but he will remain as the power behind the throne as prime minister.

Putin also shares with Amazon.com's chief executive the distinction of being named Time's Person of the Year for 2007.

That just may have implications for investors. Paul Macrae Montgomery, who publishes the insightful Universal Economics newsletter, has found after studying Time covers going back to the 1920s that the newsweekly usually catches trends in their waning months. A few months later, the trend reverses with remarkable regularity, he adds.

Editors like to think they're more informed and knowledgeable about what's going on, but in truth we mainly reflect what's in the zeitgeist around us. Which means, of course, that the story they run on the cover, page one or at the top of the home page already has been well discounted by the market.

For example, since the Economist portrayed the dollar going down in flames on its cover a few weeks ago, the greenback has moved modestly but steadily higher.

So what does Putin have to do with the markets? Consider when Bezos was named Time Person of the Year -- 1999, just months before the peak of the Nasdaq in early 2000 and bursting of the tech bubble.

Eight years later, the investing fad is emerging markets, especially the BRICs - Brazil, Russia, India and China. Putin arguably is as emblematic of the emerging markets craze as Bezos was of the dot-com bubble.

To call Putin a symbol of emerging markets' renaissance surely invites criticism. He has stomped on property rights while curbing democracy. But, as Rudolph-Riad Younes, manager of the top-performing Julius Baer International Equity fund, remarked in an interview with Barron's Sandra Ward on Dec. 10, criticism of Putin on these grounds smacks of hypocrisy.

"Russia is not a big market for our multinational corporations compared with, say, China," Younes said. "U.S. multinationals are basically helping the Chinese government catch its dissidents. In Russia, where Putin has an 80% approval rating, we are pestering him. We are being hypocritical. There has been some backpedalling on reforms, but sometimes you have to take one step backward to take two steps forward."

So Putin may not be a Boy Scout, as Time concedes, but he is a poster boy for emerging markets. And emerging markets are as much the flavor of 2007 as 'Net stocks were eight years earlier.

These days, a popular notion is that overseas markets in general, and emerging markets in particular are "decoupled" from the subprime-beset U.S. economy. Even as the American economy is bogged down with credit problems that, at last, force U.S. consumers to restrain their spendthrift ways, economies abroad won't feel much of the effects.

All of which sounds awfully like those most dangerous words to investors: "It's different this time."

While growth in domestic demand may mitigate the effects of softening export demand from their best customer, the U.S. consumer, an ever-more-integrated world makes it unlikely that emerging economies can be totally insulated from what happens in America.

But International Strategy & Income group sees emerging markets coming under increased pressure in the coming year. Emerging market economies' central banks have maintained relatively tight policies that will restrain growth, apart from anything that happens in the U.S.

So far, however, it's hard to argue against success. Looking at the charts, the popular iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM), is up approximately 30% this year. Whether it can continue into 2008 is another question.