Monday, February 04, 2008

Diverging Emerging markets

The Giants inspiring win did not buoy U.S. markets which were down 1% today. Maybe the New York traders were tired and hungover, and traders elsewhere had no inclination to celebrate. I sometimes wonder if less than serious comments here are taken seriously. Anyway, Europe was flat overall with the exception of German and Italian markets which were up 1/2%. There was stronger performance in other regions, however, as Japan and Singapore were up 2%, Mexico and Brazil up 2 1/2%, Hong Kong up 4% and Shanghai up 8%.

Excluding G-7 Japan, these stronger performances could indicate a potential rebound in the growing emerging markets that in some international quarters are viewed as being significantly oversold. With strong growth, low corporate debt, growing consumer capacity and new infrastructure, the emerging markets are viewed by many as an ongoing opportunity.

Two anecdotal examples, for what it's worth.
---Traveling last week I changed planes in El Salvador. The airport there was by no means extensive, but the terminal that I was in could have been in any mid-sized American city. It was a standard new airport with duty free shops, newstands, Salvadorian fast food delicacies, attractive bars, restaurants and even a faux English style pub. In theory it makes complete sense. The emerging country world is building or rebuilding infrastructure. I was at first surprised and I bet most Americans would have been as well.
---On the transfer to Peru I sat next to an American businessman from the Washington D.C. area. He immigrated to the U.S. from Peru in the 1960's and worked laborer jobs in the construction and maintenance business, often double shifts, for 15 years or so before starting his own company. He now employs 110 people as a subcontractor for finishing the interiors of new homes from drywall all the way to paint. He also builds a few homes on his own each year. Three of his five children work in his business and the other two are in graduate professional programs. He was going back to Peru not to visit family, although he has some there, but to expand his business there. He doesn't see any opportunity for further investment in the U.S. area that he knows. His view is that even when the current residential real estate market woes subside in the next two or three years, and "that's a long time", the opportunity for return on investment is so much greater in Peru that it makes sense regardless. When I of think Peru, I think of an unruly political process, Shining Path, danger for lone Americans, with the biggest legal business being tourists heading to the Inca ruins. Maximo does not think that way. He is enthusiastically optimistic.

Investing in emerging market ETF's in Asia, Eastern Europe, and Latin America has been rewarding for sure in recent years, but for many who went through the '80's bust in emerging markets to the '94 Mexican peso devaluation, the '97 currency crisis in Asia, the Russian bond defaults of '98, and to the woes of Argentina just six or seven years ago, it's easy to be skittish about these type of investments. In the back of my mind there lurks a notion that they are just trades. Perhaps they really are an important long term component of the asset allocation mix now, which is something that many leading investment professionals seem to already believe.

I've got to get out the house more.


Anonymous kf said...

It could be that when the U.S. economy performs well, emerging markets equities perform better than U.S. equities and when the U.S. economy performs poorly emerging markets equities perform worse than U.S. equities. They may be more sensitive to the power of the U.S. economy on both the up and down sides because they are countries with less developed capital markets and consumer markets. This is not the time to change your "notion" of what is a "trade" and what is a long term hold. Good luck.

3:04 PM  
Blogger John Borden said...

That sounds logical, and global markets are unquestionably linked. On any given day, like today, the "one world" theme is apparent. Emerging markets are also likely to have more volatility than developed ones. Over the longer term, however, they still may be an investment class that is no longer discretionary for a well balanced portfolio. Anyway, I used the word "perhaps" for a reason. Thanks for your comment.

6:03 PM  

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