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Emerging Markets Play on Global Growth

06/09/2009 12:00 pm EST


Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of the Forbes ETF Advisor, says emerging markets have done especially well as risk tolerance returns and investors bet on economic recovery.

The emerging markets have significantly higher risk profiles than the established foreign and US markets: Sociopolitical volatility [makes] these regions prone to extremes and extremists.

I think the trades are best thought of as a way to capitalize on global growth via energy and mining plays that take place [in] emerging Europe, [the] Middle East, and Africa stage in concert with the performances of China’s, Europe’s and the US’s economies. If inflation trips up, the commodity-related trajectory of these trades ought to help rather than hinder.

Dipping a bit more into the emerging markets waters—specifically by way of our stake in the PowerShares Golden Dragon Halter USX China (Amex: PGJ)—is a broader call on merging into the return of global growth down the still bailout-bumpy and recession-rutted road we’re currently on. It’s not an attempt to chase the recent gains; those recent gains, as our own market’s gains have done, have simply shown that the quotient of resilience is itself more rather than less resilient than thought or feared just a few months ago.

This is a cautious step towards better days rather than a confirmation of them. Better put, it’s an affirmation of our view that the process of stabilization in the US and China is ahead of Asia and Latin America, and to a much greater extent Europe (i.e., Czech Republic, Poland, and Russia).

I like the emerging markets of Asia overall, but our technology stake drives home the point of South Korea and Taiwan sufficiently well. Similarly, I like Latin America, but our oil position correlates well with what Latin America currently has to offer. I say this since I know that emerging markets are benefitting from significant asset inflows; most typically in an outright stake like the iShares Emerging Markets (Amex: EEM) or Vanguard Emerging Markets Stock (Amex: VWO).

A quick look at how various markets have performed from [their] peak to today reflects a theme we’ve harped on: Emerging markets trend toward a multiple of our own markets and the established foreign ones; China, dramatically more so.

Interestingly, energy became so overheated in its bid to $200 oil that the correlation chart could mislead those who don’t know any better: Energy prices correlate to growth-related demand (or its perceived or real lack) as do the markets that export energy. (Energy stocks exhibit a much higher degree of correlation.) That doesn’t dissuade me from thinking that we’ll be pushing $200 oil inside the next bull run; but it does serve to recall that a wide divergence in energy prices relative to emerging markets could be a sign of a bubble.

The threats to possible [derailments to the] emerging markets and global recovery aren’t unknown, but long-term assumption of my view deems the emerging markets to be likely profitable.

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