by Tony D’Altorio, Investment U Research
October 21, 2009
Crises have a way of overturning the established order. And as the recent G20 meeting in my native Pittsburgh reminded me, the continuing financial and economic crisis is no exception.
The very fact that the group has expanded from the original seven countries to 20 strongly suggests that Western nations no longer have the same measure of economic power they once enjoyed.
The United States, Europe and Japan have to usher in emerging economies in Asia, South America and elsewhere because these developing nations now equal those in the developed world.
Despite these tangible changes, most investors continue to saturate their portfolios with U.S. stocks, ignoring this major fact: a hefty 60% of the market cap of all equities lies elsewhere.
These Regions Will “Emerge” From the Downturn First
During the ongoing financial crisis, most of the problems surrounding subprime mortgages, toxic assets, stricken banks and overleveraging came from developed markets. And while the U.S. continues to struggle, China – an emerging market – has tried to lead the world back from recession.
This reversal in fortunes reflects emerging countries’ commitment to prudent economic policies, careful fiscal management and common sense rules regarding banks and leverages.
As Cristina Panait, Senior Emerging Market Strategist at Payden & Rygel says: “We think the emerging markets – in particular Latin America and Asia – are going to recover before the developed world because households have less debt and because the banking system will be able to extend credit to the consumer sooner.”
Hence the reason why Goldman Sachs (NYSE: GS) estimates that consumer spending in China will increase by some 10% next year, while India and Brazil rise 5% to 6% each.
As for the U.S., Europe and Japan?
If they’re lucky, they’ll remain stagnant.
Balancing Profit Potential With Risk Management
Of course not all emerging markets are alike.
Take Latin America, for example. Brazil’s size and relative stability makes it attractive. On the other hand, Mexico’s dependency on oil revenues and U.S. economic growth makes it a less desirable investment for the time being.
Likewise, countries like Argentina, Ecuador and Venezuela remain highly volatile and represent more risk.
Over in Europe, Poland and the Czech Republic have proved resilient, although Hungary and Ukraine have had to turn to the International Monetary Fund for financial support and the Baltics still face nothing short of disaster.
Yet even with those trouble spots, savvy investors recognize the new reality: that while emerging markets do have risk, so too does the developed world. The key difference is… emerging markets offer better economic growth prospects – and bigger profits for investors.
With the emergence of ETFs, there are a number of ways to play emerging markets with less risk and more diversity. You can play individual country ETFs, regional ETFs, or currencies. Here are a few to consider:
- SPDR S&P China ETF (NYSE: GXC).
- Claymore/AlphaShares China Small Cap Index ETF (NYSE: HAO).
- iShares MSCI Brazil Index ETF (NYSE: EWZ).
- Van Eck Market Vectors Brazil Smallcap ETF (NYSE: BRF).
For broader-based emerging market exposure, try out the Templeton Emerging Markets Fund (NYSE: EMF). Run by legendary emerging market investor Mark Mobius, it’s currently trading at a 3% discount to its net asset value.
Good investing,
Tony D’Altorio
Related Investment U Articles:
- China’s Interest in Latin American Commodities Continues
- Are Emerging Market Bonds Safer Than T-Bills?
- The New Silk Road And The Center of the Trading Universe
- Emerging Market Country ETFs: Why These Investments Should Be in Your Portfolio
- Are These Two Emerging Markets Getting Too Close?
One Response to “Emerging Market ETFs”
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Interesting ideas. In regards to Brazil vs Mexico, I am wondering to what extent the risk/reward is already priced into Brazilian and Mexican stocks. Brazilian stocks have been on a tear lately and Mexico is doom-and-gloom (the drug war is really hurting the country’s reputation.)
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