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Emerging markets on sale

Emerging markets on sale. Jim Jubak MSN Money Money.MSN.COM jjubak@microsoft.com 6 February 2009. The bear has taken a huge bite out of emerging stock markets.

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Emerging markets on sale

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  1. Emerging markets on sale Jim Jubak MSN Money Money.MSN.COM jjubak@microsoft.com 6 February 2009

  2. The bear has taken a huge bite out of emerging stock markets • Since the 10/9/2007 top through the close on 2/4/09, the Dow Industrial Average is down 44%, the S&P 500 is down 46%, and the NASDAQ Composite is down 46% • No where in the world to hide: Brazil down 51%, Australia 60%, China 58% (as measured by EWZ, EWA, FXI ETFs)

  3. But in the long run emerging markets outperform with less risk • Emerging markets aren’t as risky as they were • Emerging markets provide more return for the risk • If you measure peak to peak or trough to trough gains on the MSCI Emerging Markets Index (EEM)--March 31, 2000 to Oct. 30, 2007--the gain on the emerging markets index is 168%. Trough to trough (or at least trough so far) the gain from the bottom on Sept. 28, 2001 to the Nov. 20, 2008 low close is 101%. • The comparable figures for the S&P 500 are peak to peak a 2.5% gain and trough to trough a 10% gain. • Volatility is higher but not that much higher. 60% loss for the MSCI Emerging Markets index versus 46% for the S&P 500 in the current bear.

  4. The bear is separating the chaff… • Chaff markets: Those with under-developed domestic banking systems, arbitrary and unpredictable economic decision making, one-sector economies, and inadequate reserves. • Chaff poster children: Ukraine (no reserves and dis-functional politics), Hungary and Romania (balance of payment and government deficits), Iceland (speculative excesses in financial markets), Ireland (economy less competitive globally than it seemed with EU subsidies running out) • On the chaff cusp: Poland, a replay of Ireland? (Collapse of zloty raises questions about extent of Polish miracle), Vietnam (Is this really a replay of China on a smaller scale) • Disappointments: Russia (where the government has decided to risk a recession rather than spend more reserves on stimulus) and India (where the central government just can’t get its infrastructure act together)

  5. …from the wheat • China where an authoritarian central government has shown a surprising ability to combine the same old, same old (big spending on infrastructure) with a few new tricks (increased healthcare and education spending) in response to an crisis in economic growth. Likely that growth decline will be no worse than a drop to 5% to 6% in 2009. (Granted from 11% in 2007). • Brazil where the economy has become surprisingly balance (not just a commodity exporter anymore) and a growing domestic middle class has created a consumer economy to go with rising exports of food, oil, and iron ore. • Canada, Australia, and South Africa where natural resource economies are riding the boom in emerging economy growth • Special call out to Chile where government has adopted rainy day fund for natural resource economy

  6. How to buy the wheat: ETFs • EEM—emerging market ETF • ECH—Chile ETF • EWZ—Brazil ETF • EWA—Australia ETF • EWC—Canada ETF • EZA—South Africa ETF • FXI—FTSE China ETF

  7. How to buy wheat: 10 individual stocks • BHP Billiton (BHP) • Central European Distribution (CEDC) • EnCana (ECA) • HDFC Bank (HDB) • Impala Platinum (IMPUY) • Itau Bank (ITU) • LAN Airlines (LFL) • Potash of Saskatchewan (POT) • Thompson Creek Metals (TC) • Vale (RIO)

  8. When to buy the wheat • China could bottom before U.S.—low for economy mid-2009. Can start dollar cost averaging in now or wait for more bad news on growth before investing lump sum • Most of other emerging market economies will bottom after U.S. Dollar cost average starting in mid-2009 with lump sum investing to wait until last quarter of 2009. • Remember a recovery in the U.S. stock market will probably pull money out of emerging economy stock markets.

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