Two Bets for an Emerging Bull

04/28/2009 1:00 pm EST

Focus: ETFS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Bull Market Alert, says two emerging markets look particularly good if the world economy doesn’t fall off a cliff.

It looks like the "decoupling theory"—that the stocks of emerging markets are set to do better than those of developed markets such as the United States—is making a comeback. Most emerging stock markets across the globe are now up well over 20% from their bottom, meaning that the current run has met the technical definition of a bull market.

The iShares MSCI Taiwan Index (NYSEArca: EWT) [is] a bullish bet on the world economy.

If there is an economically bullish part of the world, it is mainland China. And although China's economic growth has slowed to 6.1% in [the first quarter,] the government's stimulus package may be helping to get the economy back on an even higher growth path. And with nearly 40% of its exports going to China, no other country’s economy benefits more from increased Chinese demand than Taiwan.

Just recently, Taiwan Semiconductor Manufacturing (NYSE: TSM), the world's top contract chip maker, announced that it has started adding hundreds of staff at its research and development department and other manufacturing plants. Why? New demand is arising from China's recent move to encourage spending on electronics in rural areas.

[Also], just a few weeks ago, Taiwan’s voters gave a resounding victory to Ma Ying-jeou of the opposition Kuomintang (KMT) party in the island’s presidential election. The KMT advocates a free-trade agreement and eventually a full-fledged common market with mainland China. Long-term investors like Jim Rogers are investing in Taiwan on expectations that a merger between mainland China and Taiwan is inevitable.

Third, while the bulls and bears in the United States debate the technical merits of “resistance” levels that would confirm whether we are in a bull market, the Taiwanese market has already burst through those levels like a knife through warm butter. So buy EWT and place your stop at $7.30. For potentially even bigger gains, try the September $9.00 (EWTII.X) calls. (It closed just below $9 Monday—Editor.)

Here’s why I [also] think the iShares MSCI Chile Investable Market Index (NYSEArca: ECH) will continue to perform strongly over at least the next six weeks.

Thanks to its fiscal prudence, its lack of a domestic housing bubble, and its sizeable wealth reserves, Chile has weathered the current global economic meltdown better than most countries.

Second, a bet on Chile is a highly leveraged bet on any upturn in the global economy. As the world’s largest producer and exporter of copper, Chile relies on exports for 43% of its GDP. And copper prices have jumped nearly 30% this year alone.

The Chilean ETF bottomed on December 5th and [recently] it crossed its 200-day average—perhaps the only emerging stock market in the world that is trading above this key technical level.

So, buy ECH and place your stop at $29.50. (It closed above $35 Monday—Editor.)

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