Canaries in the Chinese Coal Mine

10/20/2011 3:13 pm EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and

Emerging-markets investors need an exit strategy in case the global growth story curdles, says Doug Fabian, editor of Successful Investing, in this exclusive interview with

Taking a look at China and emerging markets, we are seeing some slowdown in China, but still growth there. Does that offer any opportunity for investors?

I really believe investors should watch China closely over the next couple of months. China has corrected along with the other emerging markets in a similar fashion to the United States, just a couple of percentage points more on the downside.

When we go back to the previous bear market, we were down 40%. China and the emerging markets were down 70%. So if we do go into a global slowdown where China’s growth is going to slow significantly, the commodities story then slows on the emerging markets, and the commodities themselves fall in price…it can create a very fast moving investment environment.

So, I am hopeful that we are going to stabilize around current levels, but feel that this crisis, this decline, and what eventually could even turn into a bear market again is going to create opportunities overseas, as well.

There is a lot of risk that people are not taking into account today. These emerging markets can fall very, very rapidly if that global growth story becomes questionable.

What ETFs should we be watching to see what is going to happen?

The iShares FTSE China 25 Index Fund (FXI). This is really the Dow Jones Industrials of China, the 25 largest companies, including banks. If those stocks hold up, perform well, the Chinese economy is OK. If those stocks break down that is problematic.

The other ETF to monitor as an indicator for the emerging markets is the iShares MSCI Emerging Markets Index (EEM). EEM is a basket of the emerging markets: China, Brazil, and it also has South Korea and Taiwan. It’s a good mix with a lot of natural resources within those countries. A lot of investors are in that and in it to their eyeballs.

So far, it has just been in a correction. If China slows down, the floor can fall out of that, and a lot of people can head for the exits. You have to be disciplined with your exit strategy if that is a theme that you are playing right now. So those are the ETFs to watch as to whether or not we are having a breakdown in the global growth story centered around China.

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