New Leadership Emerging

10/26/2009 11:03 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Singapore and Australia are great indirect plays on China’s growth, while emerging markets should become more central to investors’ portfolios, writes Carl Delfeld in the Chartwell Global Wealth Letter.

Country exchange traded funds (ETFs) are a great way to organize a global portfolio and for challenging broad conventional indexes like the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) and the iShares MSCI EAFE Index Fund (NYSE: EFA), which weight countries based on their market capitalization rather than future growth potential. As E.E. Cummings aptly put it: “my only permanent address is tomorrow.”

Let’s take a brief look at look at Singapore, Australia, and then emerging markets to illustrate this strategy.

Singapore is a high-quality, geographically well placed market at the center of the Asian growth story. It is a smart way to play what for now is a sharp recovery in share prices and economic activity. Singapore's economy surged for a second straight quarter, and the government boosted its 2009 growth forecast, as manufacturing cemented the city-state's emergence from recession.

Gross domestic product grew an annualized, seasonally adjusted 14.9% in the third quarter, following a jump of 22% the previous quarter. The economy also expanded from a year earlier for the first time since the third quarter of 2008. GDP was up 0.8% from the July-September quarter of 2008.

Another attraction of Singapore is its balanced economy, with trade, finance, and tourism fueling one of Asia's highest living standards. Manufacturing soared an annualized, seasonally adjusted 35% in the third quarter, while services grew 9.5%. The growth in the second and third quarters is the most of any six-month period since the government began releasing quarterly GDP figures in 1975, said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore.

Australia is another country that has weathered the global financial crisis much better than most. Until late last year, Australia had not seen a quarter of negative GDP growth since 1990. The lucky country was achieving GDP growth of 2.5% to 4% before the crisis, and recent quarterly annualized GDP growth rates of -0.7%, 0.4%, and 0.6% growth and an unemployment rate at 5.8% were still a creditable performance for a developed economy. Australia is at the sweet spot of China’s growth and the mood down under is extraordinarily upbeat.

And don’t neglect the opportunity to move up the risk/reward spectrum to take a good look at emerging markets. The companies in emerging market country ETFs such as the iShares MSCI Thailand Investable Market Index Fund (NYSE: THD) are more closely tied to its domestic economy and offer more of a pure play on local markets. [So far this year,] the MSCI Emerging Markets Index is up by 67%, and from the early March low almost 100%.

Emerging market investing is not a fringe area where you can just put 5% of your portfolio in an index fund and go asleep. It is not just about trying to capture economic growth rates three times larger than in America and Europe or seeking stronger currencies, more fiscal discipline, and investing in a rising middle class. It is bigger than that.

The world is filling in right before our eyes. Sharp improvements in technology and communications, coupled with economic market reforms, are allowing emerging market countries to close the income gap with the West, and this will continue for some time. Emerging markets now account for half of global economic growth and 33% of world GDP. Emerging markets need to be at the core of your global strategy because they can make you wealthy if you properly manage the risk and volatility.

Consider these facts: In 1990, mainland China's GDP was roughly equal to that of Taiwan; now it is ten times bigger. Despite all the progress India has made to date, its per capita GDP is still only about $1,000, with plenty of room to grow. Brazil now has a GDP approaching $2 trillion dollars, ranking tenth in the world, and just this month was upgraded to investment grade status.

Turkey's economy is now the 16th largest in the world—just behind South Korea. Indonesia, the third largest democracy in the world, [has seen its stock market rise] 109% so far in 2009. Another sign that emerging markets may have a way to run is that the average pension fund only allocates an estimated 5% of its portfolio to emerging markets, yet they make up 30% of the world’s GDP, according to the International Monetary Fund.

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