Independent Investor: Emerging Markets — Times Are Changing

While the investing world is distracted by the U.S. debt ceiling crisis and the on-going drama of Italy and Greece, I've noticed that a small but increasing stream of money is finding its way back into some emerging markets.  

Last year, I advised investors to lighten up on emerging markets. That proved to be the right call. The Chinese market is now below the levels last seen in late 2009. India and Brazil have lagged world markets as has Russia. But usually you want to begin to invest in these markets before their stock markets turn. Today, I think it may be the right time to start nibbling in the area. Here's why.

The increase in commodity prices was a major negative for many emerging markets, notably China, India and Brazil. Their factories are voracious users of energy, such as oil and coal and a host of base metals and agricultural food stuff. When prices of these inputs go up, combined with a fast growing economy, inflation follows quickly.

Many emerging market governments have had to contend with this problem by tightening credit and raising interest rates over the last two years. When commodity prices come down, as they have done over the past four months, it relieves some of the inflationary pressure and allows governments to loosen monetary policy a bit. That reversal of fortunes is happening at the moment.

China, the big dog of emerging markets, has raised interest rates five times this year. Last week, they raised them again but indicated that it may well be the last hike this year. The Chinese central bank has not changed its rigid stance toward fighting inflation quite yet, but it expects to see some lessening in the inflation rate this month. Investors have worried that all this the belt-tightening in China (and other countries) would lead to a "hard landing" for the economy, but the country reported steady growth for the second quarter coming in at 9.5 percent, only slightly lower than the first quarter's 9.7 percent growth rate.

But things have changed in the investing landscape among emerging markets. Gone are the days when one could simply buy a fund that is exposed to all emerging markets and hope to prosper. Brazil and other Latin countries, for example, are tied to the prices of the commodities they produce, so what may be good for China, may be bad for Brazil.

India, like China, has an inflation problem but seems to have a better handle on controlling inflation and imports more natural resources than it exports. Some other Southeast Asian countries such as Vietnam, Indonesia, Malaysia, Singapore and Taiwan have their own set of economic variables, although many of them still depend on China's continued growth for their own prosperity.

Korea, on the other hand, may not even be an emerging market any longer in my opinion. Latin American countries like Mexico, Peru, Chile and Argentina join Brazil in combating high inflation brought on by the very thing that is responsible for their growth, natural resources.

About the best that can be said is that as emerging markets develop, each country's particular set of circumstances can provide both an opportunity and a challenge. Gone are the easy-money days of simply buying them all and watching your portfolio go up and up as it had in the period of 2002-2007. Now it takes some homework and a bit of luck.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.