These Countries Will Spearhead the Next Emerging Market Wave
by Karim Rahemtulla, Investment U's Emerging Markets Expert
Tuesday, November 9, 2010: Issue #1384
Mention "emerging markets" to the average investor on the street and chances are, you'll get a flurry of responses that include Brazil, Russia, India, or China - the BRIC nations.
That's why we at Investment U like to steer off the beaten path and focus on the fast-growing countries that aren't receiving as much attention. For example, my colleague, Carl Delfeld, has profiled Indonesia, Singapore and Malaysia recently.
For the most part, however, there's a perception that it's "BRIC or bust" when it comes to emerging markets.
But the truth is, emerging market investing has come such a long way in a short period of time that there is now ample information and opportunity for even novice investors to build positions outside of American stocks or the U.S. dollar. For example, all the countries above have ADRs, which makes them easy to trade.
But where are the other emerging market opportunities - the ones that the masses haven't yet discovered, or whose stocks aren't yet listed as ADRs?
Let's find out, as they may well represent the most lucrative opportunities going forward...
Get in on the Ground Floor of "Pre-Emerging" Markets
These "pre-emerging markets" (as I like to call them) are split into two basic groups - Asian and non-Asian.
And with much attention already focused on the Asian region, it's the non-Asian area that's garnering the most interest - and the best opportunities. Specifically, in Africa (excluding South Africa, which is already a tradable market).
And it's no surprise that the African companies gaining the most attention are ones tied to commodities... and China. The Chinese have been busy buying up or investing in African assets for more than a decade now. And recently, they've stepped up their buying in the resource sector, as they trade in their depreciating U.S. dollars for hard materials.
But it's not just commodities. Africa is also seeing growth in other sectors such as industry, banking and transportation.
So the question is: How do you play this growth?
Well, it's a bit trickier than other emerging markets because unlike China, Africa isn't a homogenous country with a single government. While it's home to one billion people, there are more different and distinct populous groups on the African continent than on any other.
So it's not going to burst onto the investment scene with the same speed and power as China has. Rather, African growth will come from countries that are able to capitalize on their resource-based economies and trade with major economic powers like China. And opportunities will come from the companies that have mining interests there, or through conglomerates. If you're interested in gaining exposure to this pre-emerging market, consider the following ETFs:
- Market Vectors Africa ETF (NYSE: AFK)
- Market Vectors Egypt Index ETF (NYSE: EGPT)
- iShares MCSI South Africa Index (NYSE: EZA)
So what about the Asian opportunities?
Are China and India Overplayed?
Having tracked India and China extensively over the past 15-20 years, some people ask me if the Asian investment story is now overplayed.
After all, there's so much focus on these two nations in particular that many investors consider them to be the most viable places to invest.
But that couldn't be further from the truth.
Yes, it's easy to invest in China and India today through ADRs - whether they're direct investments or if you buy them through mutual funds.
But the hyper growth over the next decade may come from other Asian countries that many investors haven't even considered. Countries that have a high correlation to the two Asian powerhouses and which will benefit from the growth in Asia.
As the outsiders, they get the investment "crumbs" - but in the emerging market lifecycle, you can quickly go from an unknown and impossible pre-emerging market with just a few local companies, to a full-blown emerging market with dozen of ADRs. And as the Asian region develops, those crumbs are becoming increasingly valuable.
And the pre-emerging Asian market opportunities are...?
Pre-Emerging Markets: Tracking the Tiger Cubs Across Asia
I've shortlisted four countries that I think are well-poised to challenge the status quo from China and India:
- Sri Lanka
Vietnam and Cambodia in particular are in position to undercut the production costs that are now escalating in China. In other words, China may have to subcontract to them in order to compete.
And Sri Lanka has the obvious advantage of being close to India and the rest of Southeast Asia.
As for investing in these emerging markets, there are a few ways to participate in them without investing locally (which is possible).
Over the next few weeks, I'll examine some of these pre-emerging markets in more depth, where I'll not only try to unearth opportunities, but also figure out ways in which you can effectively invest in them.
And a date for your diary, too: On January 18, 2011, I'll be leading an exploratory trip to Southeast Asia. We'll start in Singapore and then take in Vietnam, Cambodia and Thailand. For more information about the itinerary - and how you can join us - click here.