Midterms' Biggest Winner: Asia

09/30/2010 11:29 am EST

Focus: ETFS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of Silk Road Investor, says the midterm elections should help push stocks higher, but emerging markets, especially in Asia, should perform the best.

Stocks traditionally perform well during US midterm election years. With the Republican Party likely to win a [large] number of seats in both chambers of Congress, investor sentiment towards the stock market and taxes should shift.

The current political and social climate is similar to what we saw in 1994, when Republicans rode a wave of dissatisfaction in the electorate to win 52 seats in the House of Representatives and nine in the Senate. Then, as today, the president’s approval rating had fallen and Congress was deeply unpopular with the public. The result was a congressional changing of the guard and a robust stock market.

We believe the US economy will not experience a double-dip recession this year, though growth will slow. We expect a “soft landing” outcome that, coupled with incremental economic growth, can create a favorable climate for equities at the end of the year. Furthermore, investors are generally underweight equities and will have to purchase stocks should markets continue [their recent] upward trend.

The US export sector and economy will continue to benefit from growth in emerging markets. According to the US Census Bureau, the share of US goods going to countries beyond the traditional destinations of Europe or Japan rose to 73% from 69% over the past five years.

US-based investors should consider allocating more funds to emerging markets, paying special attention to opportunities in Asia [outside] Japan. The region remains undervalued relative to global markets, but it won’t be overlooked for long given its strong fundamentals.

Private-sector debt in Asia (except for Japan) is at 77% of GDP, versus the 160% in developed economies. Government debt in Asia is at 32% of GDP, compared to 117% in developed economies.

Fixed-investment spending growth in Asia has been extremely strong this year, rising 14% even if you exclude China and India. Investment spending is the key growth driver for many Asian economies. Finally, Asian currencies remain undervalued, and while a spectacular appreciation is unlikely, they will continue to inch higher, thus enhancing returns in US dollar terms.

For the past five years the MSCI Emerging Markets Index has outperformed the Standard & Poor’s 500 index by about 80%. An even more painful statistic for S&P acolytes: Over the past ten years, the MSCI EM has outperformed the S&P 500 by 150%.

By virtue of their superior economic growth prospects, emerging markets will continue to perform better than their developed counterparts for some time.

Investors face a new reality that requires stepping outside the traditional sandbox of domestic equities. Many investors have already made the jump: Inflows to emerging markets have increased since the credit crunch abated in the beginning of last year.

iShares MSCI BRIC Index (NYSEArca: BKF) offers exposure to the four biggest emerging markets—[Brazil, Russia, India, and China, the BRIC countries].

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