Emerging-Markets Winners Spoiling for a Fight

10/14/2010 11:23 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

They hid the fine china and good linens in Washington, DC before the annual meeting of the International Monetary Fund. Ahead of the dysfunctional-family reunion, there had been rumblings about currency wars and investment moats.

The Chinese premier had drawn a line in the sand by warning of social unrest should the yuan gain 20% against the dollar. The US, in turn, turned up the heat on Beijing to permit that and more. The prospect of asset purchases by the Federal Reserve and the Bank of Japan promised to hasten currency adjustment without resort to the trade sanctions threatened by a foul-tempered Congress.

The booming developing world, in turn, showed up in Washington demanding more respect and power. Of the fund’s 24 directors, nine are Europeans, and Belgium has more voting strength than India or Brazil. Decisions on a more equitable arrangement were put off until the upcoming G20 summit in Seoul. As another sop to the emerging markets, the IMF chairman offered annual reviews on the economic policies of the major powers. The major powers told him to sit tight. So, everyone went home no wiser and no happier than before, whereupon stocks resumed their rally.

Asian and Latin American markets continued an advance begun long before the Fed became dissatisfied with the pace of the US recovery. Wall Street has all but written off this rally as a by-product of the Fed’s money-printing plans. But that ignores a year’s worth of economic progress beyond its back yard. Chinese exports and imports have risen by some 25% in 12 months. Consumer confidence in Australia has bounced back toward its recent highs. Brazil is growing at its best pace in two decades and shows no signs of slowing down.

The recently lagging Chinese market is now up 20% from its summer lows, tempting the late arrivals to the global party. And whatever they say in Washington, they can’t get enough of China in New York. Most of the Chinese ADRs highlighted in this space two weeks ago have stayed red-hot. Renesola (NYSE: SOL), described last week in this space as “quite cheap,” is less so after gaining another 16% in five days; it’s nearly doubled in two months. 

Just a few days after Paul Goodwin noted that the Halter USX Index representing US-traded Chinese ADRs was poised to break out, it’s just done that, convincingly. Some of its constituents have been bid up to nosebleed valuations. But the same can’t be said of Shanghai stocks or of emerging markets in general. They still fetch lower price-earnings multiples than stocks in the US, despite a much more promising growth rate.

Certainly the Chinese port stock recommended by Yiannis Mostrous seems cheap based on its trailing dividend yield of nearly 9%. With China’s energy imports on an inexorable rise, this oil import hub should eventually prosper.

Gordon Pape’s pick seems a safer bet if only because it’s not reliant on a single country or industry. Instead, it’s a highly diversified infrastructure play focused on the world’s most dynamic regions that still manages to yield some 6%. To get equivalent income from a bond, some people have been willing to lend the government of Mexico their money for the next 100 years. That doesn’t sound like a great bet. There are better bargains to be had in equities.

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