Emerging Markets Are Now An Attractive Investment

Here is an article from Kitco.com on emerging markets as an attractive investment.

(emphasis mine)

One place to find these [attractive] stocks is in emerging markets. The dramatic growth in foreign exchange reserves of the BRIC nations makes them attractive.

As you can see in the chart below, the $260 billion in combined reserves in those four countries in late 2000 is less than India' s reserves now and is but a small fraction of the nearly $2 trillion held by China. Most of those reserves are held in dollars.



These dollar reserves, and the hundreds of billions more held in the Middle East and other emerging markets, provide a valuable buffer in uncertain economic times. These reserves were far smaller a decade ago, when both Russia and Asia went through currency crises.

And with the dollar' s recent rally, these reserves are worth more than they were just a couple of months ago. The size of reserves and their enhanced value could reinvigorate these key emerging markets and accelerate their economic recovery.

I am often asked why the dollar and yen have been so strong lately while other currencies and commodities have been clobbered. The Reuters/Jeffries CRB Commodities Index, for example, lost 24 percent of its value in October -- its worst month ever.

Many banks and hedge funds have borrowed in dollars and yen and used that money to invest in euros, emerging markets, commodities and equities. Now they are being forced to pay back these loans, so they have had to sell commodities, stocks, emerging markets and euros to get dollars and yen. This has created a buying frenzy in dollars and yen, and in turn exaggerated market volatility.

Many of these emerging markets companies are trading at two to six times earnings, compared to the S&P; 500 average at more than 21 times earnings. This disparity can' t last forever, and as liquidity is pumped into the system, the indiscriminant selling will stop and global stock prices will firm up and begin their return to historic P/E ratios.



Looking at Asia, the MSCI AC Asia ex-Japan Index has fallen off abruptly in recent months, with many stock markets trading at price-to-book ratios near their lows during the 1998 Asian meltdown.

Risks remain in emerging markets, but with valuations so low in a region whose economies are so much larger and more diversified and resilient than they were a decade ago, the opportunities look increasingly attractive.

My reaction: With the dollar's collapse on the horizon and stocks that are trading at ridiculously low PE ratios, emerging markets with large dollar reserves, especially China, look like an attractive investment. However, the global economy Is still entering a severe recession, so it is critical to choose the right stocks. Here are a few themes to keep in mind when looking for possible investments in emerging markets:

  • Not all currencies will benefit equally from the dollar's collapse. European countries will benefit the least and Asian countries the most. The size of each country's dollar reserves is a good indicator of how much its currency will benefit from the dollar's fall.
  • Cheaper oil. The biggest impact of the dollar's collapse will be to curtail US oil consumption. The result means more oil at a cheaper price for the rest of the world, and foreign companies with high fuel costs will benefit.
  • Cheaper US exports. The dollar collapse will make US export cheap for the rest of the world. Foreign companies that make large purchases from the US (ie: Chinese companies buying US coal) will benefit.
  • Bankrupt US consumer. All company which sell heavily to US consumer should be avoided. The dollar's collapse will force Americans to spend more of their income on food and gas, leaving little for expensive chinese imports (they will be expensive after the dollar's fall).


Sidenote: Anyone know how global tech companies charge for their services? Does microsoft bill Chinese/Indian companies in dollars? If so, it could drastically reduce the tech costs for companies in emerging markets.

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0 Responses to Emerging Markets Are Now An Attractive Investment

  1. PinkPanther says:

    Thanks for the nice article

    You mention the coming dollar collapse. What happens to a fund of emerging market stocks which trade currency is USD once the dollar collapses?
    Am I still owner of those shares (which are in emerging market currencies) or will the fund go south since it's traded in USD?
    -
    Daniel

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