By Sara Nunnally, Editor, Smart Investing Daily, TaipanPublishingGroup.com
Back in mid-August, I told you about new growth in investments in emerging markets. I even noted a couple exchange-traded funds that might benefit from such growth.
I talked about the iShares MSCI Turkey Investable Market ETF (TUR:NYSE) and the Market Vectors Indonesia ETF (IDX:NYSE), and since Aug. 12, 2010, I’ve been keeping track of these two. The IDX has climbed 18.94% as of Friday’s close, and the TUR has jumped 31.15%!
When I mentioned TUR and IDX, I noted that investor cash would be a huge driver in these markets.
But is this true for all emerging markets, or just select ones?
Are there still emerging markets that you should be wary of?
There is still a lot of fear surrounding the U.S. dollar and the stability of the American economy, and that’s pushing a lot of investors outside of U.S. markets. That’s what’s been supporting such big gains in emerging markets.
Some investors are taking gains off the table.
On Sunday, Bloomberg reported, “[Morgan Stanley] lowered its recommended “overweight” in developing-nation stocks to 4 percent from 6 percent and added to holdings of cash.”
The broker said investors should start to “scale back” their holdings in emerging market stocks.
Morgan Stanley gave emerging markets an “overweight” rating back in late May, and since then, says Jonathan Gardner for the broker, valuations have returned to “long-run average levels.”
On the other hand, China’s Shanghai Composite climbed for the eighth day — the longest rally in 11 months. And late last night, MarketWatch reported that Caterpillar, Inc. (CAT:NYSE) would form a joint venture with China’s AVIC Liyuan Hydraulics Company.
Clearly there are still some opportunities in emerging markets.
And the Shanghai index is trading at 16 times earnings, which, according to Bloomberg, is near record lows.
So how do you determine which emerging markets are viable investments for your portfolio?
There are some key principles you should keep in mind when looking at international markets.
Learn How to Legally “Trick” a Mutual Fund Into Paying for Your Retirement
You could “siphon” thousands of dollars a month from the profits of the mutual fund industry.
Does This Market Have a Dynamic Financial System?
This question is crucial from two points of view. First, can you, the investor, access it easily without issues of illiquidity or the need to jump through too many hoops? The large and growing number of international exchange-traded funds and the availability of ADRs and GDRs make it ever easier for individual investors to explore opportunities on a global platform.
Second, does the country’s financial system have the ability to adapt to changing market conditions? Is it diverse enough to weather a drop in, say, commodity prices, or a shock to its financial institutions? The more diverse the system, the more developed the economy, so this can be a good gauge of where the country is compared to other emerging or developed markets.
(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy and I simplify the stock market for you with our easy-to-understand investment articles.)
Does This Market Have Large Cash Reserves?
When the recession hit global markets, cash suddenly was thrust to the forefront as the safe haven. Emerging markets with substantial sovereign wealth funds are likely to be stronger than those that rely just on foreign direct investment to inject cash into its economy.
China was able to inject more than half a trillion into its economy, and this emerging market is expected to grow 9.9% this year. Abu Dhabi’s Investment Authority holds $627 billion, and Singapore’s Temasek has $133 billion. These guys have the ability to invest in themselves — to stabilize and grow their own markets with this cash… But they can also take this money global and make huge investments in international markets for greater returns.
Breaking Investment News: At this moment, 7 “mega-trades” are emerging on the horizon.
Get in now, and you could cram 10 years of wealth-building into the next 12 months.
Does This Market Have Political and Economic Freedom?
The recent news about the Nobel Prize winner for peace, Liu Xiaobo, remaining in prison in China for circulating a petition known as Charter ’08 demanding civil liberties, judicial independence and political reform, calls into question how much political freedom China allows, and how this affects its relationship with the rest of the world.
India’s government restricts the economy through overly strict regulations that deter some investments and business startups. And state institutions still dominate some markets, such as the banking industry. Corruption is also a concern.
These things make investing in an overall market a holistic endeavor. You are subject to all these risks and you have to determine if the growth potential is worth it for you.
Fortunately, global markets give us a number of different ways to invest in emerging markets. There are ETFs that allow you to invest in a market across a number of sectors, but there are also ADRs that allow you to strategically position yourself in a specific company in a particular market.
These three key principles should be fulfilled with either investment strategy, though, unless you’re preparing to short a market or ADR, and can be applied to every emerging market available for investment.
Don’t forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.
About the Author
Sara is Co-Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country.
As Senior Research Director, global correspondent and co-editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
