Daily Archives: June 10, 2011
Back to the drawing board, boys and girls.
Plenty of big investors who hastily decided last September that it was time to pull out of the emerging markets due to worry that the vaunted growth in those areas was decelerating are now reformulating their strategy and recalibrating their portfolios. It’s back to the future – to the markets where future strong growth is clearly visible based on their still brisk economic advance.
With the U.S. major stock market indexes falling hard since early May, most of the large institutional investors, spooked by the slowdown in the economic recovery, have refocused their sights toward markets where growth has defied gravity: the emerging countries, specifically Brazil, Chile, Hong Kong, Peru, Uruguay and Singapore.
Most of the developed markets, mainly the U.S. and Europe, are deeply immersed in debt which has hampered the global economic recovery. The emerging countries, on the other hand, are generally less burdened by debt. And the big companies in the emerging markets generally have solid balance sheets and are much less levered than their peers in the developed markets.
Indeed, if only for these reasons, “the emerging markets should be where investors should place their investment bets now,” says James D. Awad, managing director of Zephyr Management, a global private equity and marketable securities outfit based in New York and operates offices in the U.K., India, and Africa.
Awad notes that emerging markets represent 80% of the world’s population, 70% of foreign exchange reserves, and 53% of GDP, but only 12% of the world’s equity market capitalization. That means the emerging markets have significantly more room to grow in the world markets, says Awad.
This is one reason why Zephyr, which specializes in the creation and management of highly focused and value-added investment funds in the emerging markets, is highly optimistic about opportunities in the developing countries. Since its founding in 1994, Zephyr has sponsored 22 investment funds representing about $1.9 billion in capital commitments in the emerging markets.
According to the International Monetary Fund, emerging markets are expected to contribute over 50% of global GDP by 2014, and will continue to be the paramount engine for secular global growth.
“A fast growing population and GDP growth are among the dominant factors boosting the emerging markets’ advance,” says Awad. And expectations are the population and GDP growth in these countries will eclipse those of the developed world, resulting in rapid urbanization and expansion of the middle class in the emerging markets, says Awad.
Zephyr predicts that rising incomes and the emergence of a stronger new middle class in the emerging countries will substantially increase demand for goods and services. “And this is where the growth opportunities will be,” says Awad, which aren’t now in evidence in the developed markets. The developing countries’ GDP as a percentage of global GDP is expected to reach 51% in 2014, up from 36% in 1980. With that kind of a brisk advance in its GDP, “we believe the emerging markets will be the key driver of global economic growth over the long term,” says Awad.
THE RISE OF A STRONG MIDDLE CLASS
So how should an investor play the opportunities in the emerging markets?
First of all, don’t hastily jump into the ETFs (Exchange Traded Funds), and also don’t chase individual stocks trading in the extremely volatile markets in China and India. Here’s why:
Be aware that not every country in the emerging or developing markets are necessarily enjoying rapid growth. So by buying into the emerging-market ETFs, you could end up being invested in some of the slow growth countries. Worse, you could end up tying up your money in countries where corruption is rampant, or where a country’s politics or policies are subversive or engender violence.
So investors would be better off going with mutual funds that specifically invest in growth opportunities in Latin America and Asia.
Two of the major mutual funds that focus directly on the emerging markets are the Lazard Emerging Markets Portfolio Open Shares (LZOEX), now trading at $21.83 a share, and Lazard Emerging Markets Portfolio Institutional Shares (LZEMX), selling at $21.46.
In Latin America, investors should go for mutual funds that are directed towards investing in assets with great value potential in Brazil, Chile, Columbia, Peru and Uruguay, according to some pros.
In Africa and India, however, the experienced investment managers who focus on the international markets put their money in private equity capital groups usually organized and launched by large U.S. investment institutions, rather than invest in mutual funds.
In India, in particular, even the experienced and sophisticated investors could lose their shirts because of the extreme volatility in its markets. “Hot money” dominates in India’s markets and drives the up-and-down zigzags of the market. A similar situation is happening in China, where the market’s volatility poses great risks for investors.
In Asia, many global investors are investing in such conglomerates as Jardine Holdings in Singapore, which is a part of the vast Jardine Matheson in Hong Kong; Swire Pacific, a unit of the huge conglomerate Swire Group, which owns such assets as Cathay Pacific Airways and Swire Properties; and Oversea-Chinese Banking, Singapore’s second largest lender.
Investing in these companies, some pros argue, would let you participate in the growth areas in Asia, including China.
But for investors who absolutely want to play it safe, the smart way might be to snap up shares of U.S. multinational companies whose revenues come mostly from their operations in the emerging markets. Among such companies are McDonald’s (MCD), Caterpillar (CAT), Ford (F), Intel (INTC), and Microsoft (MSFT).