Today’s Hottest Global Markets and Sectors

12/01/2007 12:00 am EST

Focus: MARKETS

Nicole Pedersen-McKinnon

Editor, The Australian Financial Review Investor Section

Moderator Nicole Pedersen-McKinnon, editor of the Australian Financial Review Investor Section, hosted a panel of international experts as they discussed their favorite investment themes and countries. 

Watch the complete workshop here...

Nicole Pederson-McKinnon opened the discussion by noting that investors are facing challenging times with the subprime problem, as well as the industrialization and demand for resources in India and China. She noted that people seem to be moving away from traditional equity investments and focusing on the nontraditional, including emerging markets, exchange-traded funds (ETFs), and alternative investments such as collectibles and commodities.
 
Eoin Treacy, global strategist of Fullermoney.com, commented that while emerging markets have generally been considered high risk because of their historical volatility, that is increasingly not the case. Now, a fundamental change has occurred. China is a new center of gravity, allowing new confidence in Asia and is not nearly as volatile as in the past. Additionally, sovereign wealth funds, which first invest in their region, have tremendously expanded. Asian Gross Domestic Product (GDP) growth is beating the world, the population is young, Asian governments are improving, and their currencies are beginning to appreciate.

Peter Temple, freelance journalist and author, discussed collectibles, in which he began investing during the early 1970s when inflation was double-digit. He noted that when liquidity is being pumped in to rescue banks from their own stupidity, money goes into items with recognized value. One of his favorites is property, but it is not the right place to be in now, and he is looking at possibly a long period of prices going down. For the past three years, he has focused on stamps and coins.

His research found that the returns you could generate from collectibles offer a significant lack of correlation with other asset classes. For example, art has demonstrated a 4% real return, 6%-8% adjusting for inflation. Stamps, coins, and books are pretty consistent in nominal terms, generating 10%-12% a year. However, Temple allowed that collectibles do have plenty of drawbacks-high transaction costs and less liquidity than you would have in equities.

Carlton Delfeld, president of Chartwell ETF Advisors, shared his strategy for investing in exchange traded funds (ETFs), noting that ETFs are really an investment tool, rather than just investing in a sector. Delfeld explained that ETFs are a basket of stocks that track an index and trade on an exchange. They are one of the fastest-growing investments right now, with more than 100 on the London Stock Exchange. (There were nearly 600 trading on US exchanges as of October 2007.)

He combines ETF investing with active stock investing. Delfeld noted that most investors would benefit from a strategy combining Core (sector ETFs) and Explore (picking individual stocks). A key strategy, he said, is to challenge the indexes if you want to outperform them. He cited examples, including a world index in which US investments accounted for 48%, Japan 9%, and Singapore had a much smaller share. Consequently, if you want Singapore to have a higher allocation, you would then purchase additional investments, such as equities, that have more exposure to Singapore.

He cautioned, however, not to get carried away with any asset class, and in particular with a lot of country ETFs. It is imperative to look at valuations and make sure the investments make good sense. For example, Carlton noted that some traditional markets, such as Singapore and Ireland, are currently out of favor because of their high exposures to banking and finance. Yet they also have good valuations.

Treacy noted the great industrialization, or super cycle, that is now occurring in the commodities sector. But he cautioned investors to be aware of their trading costs as well as the global trend toward nationalization in regions such as Nigeria, Mongolia, and Venezuela. He said that mining shares are less risky than some of the major companies, since they have much better access to the fundamental assets the shares are based upon, as opposed to companies that don't actually own the reserves because they operate in regions where the assets have been nationalized by the government.

Temple is a gold advocate and said in terms of today's prices the gold high of 1980 is actually equal to $2,150/oz., giving credence to a further gold run today. He likes bullion as well as coins.

Delfeld prefers playing the commodity markets via country ETFs like those representing Canadian energy companies. He specifically mentioned iShares MSCI Brazil Index (NYSE: EWZ) and iShares MSCI Australia Index (NYSEArca: EWA).

One attendee asked Temple if physical gold was the best way to buy gold. He replied that he does have a Unit Trust Investment, Merrill Lynch Gold and General account, one of the biggest and longest established gold share funds available to retail investors in the UK (US investors can buy several gold-related ETFs and mutual funds, as well as shares of mining companies themselves.)

In response to a question, Delfeld replied that ETFs offer more flexibility than index funds, you can sell them short, can trade immediately, and can place stop losses on them. And with their tremendous growth, they offer much broader options than index funds do. He also recommended that investors worried about trading volume of ETFs look at the liquidity of the companies in each ETF.

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