As Economies Slump, How to Play Emerging Markets
Despite the looming slowdown and possible recession in global economies, the emerging markets trade continues to survive.
True, investors may have to be more selective going forward, but new safer-play options for investors help reduce risk.
Geopolitical troubles in the former Soviet bloc countries could spell trouble for the bustling Russian economies, but other areas of growth, particularly in Southern Asian countries and Brazil, still present opportunities.
"The macro issues affecting emerging market investments are some of the same ones that are affecting emerged market investing decisions, albeit with slightly different impact," says Uri Landesman, head of global growth strategies at ING Investment Management. "How deep is the recession here? How long is the recession here? A short, shallow recession would benefit; a deep, extended one would hurt."
That's because the foreign markets that are just now reaping the fruits of capitalism are highly dependent on US demand for their products. Those countries that can continue to produce products that American consumers want should still do well.
Also, one specific factor that could boost emerging markets is the resurgence of the American dollar, which adds a new dynamic to the global trade.
"From a straight currency translation, it's a positive for them. They're generating costs in a depreciating currency and generating revenues in a positive currency," Landesman says. "If there is a coupling and the world literally mirrors the US recession, albeit with a lag of six to 12 months depending on where you are, that's not a particularly positive outlook for emerging markets."
"If on the other hand, US demand snaps back and China bounces back quickly, then emerging markets could be OK."
How to Play Emerging Markets
Landesman says the best way to take advantage of growth in the so-called BRIC nations of Brazil, Russia, India and China, is selectively, by hiring a money manager familiar with the stock markets in those countries.
But failing that, retail investors can take advantage of a wide array of exchange-traded funds, or ETFs, that mirror broad stock market movements in the individual nations, or emerging markets as a whole.
China, for instance, can be played using the iShares FTSE/Xinhua China 25 Index ETF. The fund is heavily traded, with an average daily volume of more than 19 million shares, and presents value at this point as it is near its 52-week lows.
Landesman is interested now in not only China but also Taiwan.
For a look at how to invest in Bangladesh, check out the video at left.
"I think there is a big story there," he says. "Chinese-Taiwanese relations seem to be at an all-time peak."
Taiwan itself does have multiple iShares ETFs, including the MSCI Taiwan fund on the London Stock Exchange, though none that trade on American exchanges.
Landesman encourages the play of companies in Taiwan that do large amounts of business in China as increasing amounts of money change hands between the long-time adversaries.
Brazil is "Busting Out"
Investors also continue to be high on Brazil, with its emerging middle class and bustling industrial base.
"The Brazilian economy is just going on all cylinders," says John Carter of the Trade the Markets newsletter. "Brazil is just kind of busting out right now."
Investors looking for a safe play in the country can play the iShares MSCI Brazil Index which follows Brazilian stocks.
However, an increasing number of countries that trade on the American exchanges are doing business in Brazil, allowing investors to capitalize through individual stock moves.
Chip Hanlon, president of Delta Global Advisors, likes some of those companies, particularly Perdigao , a big meat and dairy producer in Sao Paulo which saw its sales grow by more than 80 percent in the second quarter.
India also presents an interesting opportunity on both the ETF and stock ends.
Hanlon likes Tyson Foods as a company capitalizing on the newfound demand for frozen foods in India, where the population in coming years is expected to overtake China and make it the nation's most populous country.
"If you're going to take a look at the consumer, I'd favor consumer staples," he says. "Within that group, I'm really a fan of consumer goods companies. A year ago we despised such names. We specifically excluded them from our global agriculture portfolios."
Uneasy About Russia, Europe
Tensions in Russia, particularly over its intervention in Georgia, have many analysts uncertain about what to expect from the country. That could spell an end to investment momentum there.
"Russia is a market that has been very, very positive over the last 10 years," Landesman says. "We really have to watch if there are seminal changes going on or if this is their way of beating their chest."
"Brazil to me is a little more appealing than Russia," he adds, "because Brazil isn't attacking its neighbors."
European economies, meanwhile, have some US investors scared because of its central bank's inaction in addressing recessionary pressures through monetary policy. Landesman says he has no money in eastern and central European markets.
Some, though, take a wider view of emerging markets when making investment decisions.
Peter Tanous, president of Lynx Investment Advisory, says broad plays on natural resource companies, timber in particular, that can take advantage of global growth will do well.
"We're investing in four areas--gold, water, energy and timber. We expect these are going to very interesting investment opportunities for the next 20 years," Tanous says. "It's not based on the retrenchment of the economy, it is based on what is happening in the world today that nobody would have predicted 10 years ago."
At the same time an air of caution remains.
"I think it's reasonable to look at these emerging markets now," Hanlon says. "But I wouldn't jump in with both feet."