I lightened up on Emerging Markets (EM) a little this week. Many of the EM markets took off to the upside after Bernanke announced no change to the current Quantitative Easing program. However, I see the current rally as just another cyclical blip that will quickly lose steam.
At the heart of the issue remains China. I’m convinced that they’ve begun to restructure their economy which means economic growth will continue to “surprise” on the downside. This affects all EM’s, especially those that are exporters of hard assets like copper, coal and iron ore, since China is the largest buyer of just about everything. If you’re interested in learning more about what’s going on in China, I recommend the book: The Great Rebalancing, by Michael Pettis. He’s been spot on with the structural imbalances in the global economy.
China ETF (FXI) – 4 years
Many of the other largest EM nations like Brazil, India and Indonesia continue to face some serious structural economic issues that they’ve pushed off for political reasons. These are coming back to bite them badly now creating civil unrest, loss of faith in the government and continued outflows of capital. Politicians are always so out of touch with the real issues. I find it amusing that every time they try to force their way, it backfires and they get the opposite result. India is a prime example – just look at all of the measures they’ve taken to ban the importation of gold in an effort to stop the inexorable selling of the Indian rupee, creating huge current account deficits. Indonesia is also burning through their central banking reserves very quickly in an effort to support their currency and slow the outflows. Not good… Until their governments wise-up, or more likely, their people elect new governments, I’m not too optimistic about these economies.
Brazil ETF (EWZ) – 4 years
India ETF (PIN) – 4 years
Indonesia ETF (IDX) – 4 years
I don’t want to eliminate exposure completely because it’s important to maintain the diversification so I’ve done quite a bit of research over the past few months to really drill down on the countries that I feel offer the best investment opportunities. Some of these include New Zealand, Mexico, Malaysia, Thailand and Taiwan, but I’ll be waiting for big dips before jumping on board.
Have a great weekend!
-Nick