Emerging Markets Will Be Back but Different: 7 Investing Ideas

By Craig Mellow  JUN 24, 2013 9:30 AM

Options for future emerging markets investors include Turkey, Mexico, and East Asian countries.


This weird little moment in financial history, when the world went into a panic because its biggest economy might be healing, will pass. Markets will come back.

Even emerging markets will come back, eventually. It is true what aficionados like Mark Mobius say: The developing world still accounts for most of the whole world’s economic growth, so its stocks cannot keep falling forever.

But when emerging markets come back, the best way to invest in them will likely change. Every one of the BRIC countries that dominate the broader EM indices has run into serious dysfunction with its growth model. Brazil and Russia are afflicted by soft commodity prices. China’s massive state-sponsored stimulus has spawned an out-of-control banking system. India is reverting to regional fractiousness, bureaucratic strangulation, and overspending on gold jewelry.

Each one needs a rethink and substantial shift in direction, which does not come easily or quickly to societies with huge populations and deeply entrenched interest groups. It’s no wonder emerging markets writ large are having a rotten year. The iShares MSCI EM Index Fund ETF (NYSEARCA:EEM) has dropped 16% so far in 2013. The S&P 500 (INDEXSP:.INX) is still up 9% despite the recent ructions.

But there are alternative approaches that may become attractive as nerves calm globally. A few ideas:
ETFs tracking the Indonesian (NYSEARCA:IDX), Philippine (NYSEARCA:EPHE), and Vietnamese (NYSEARCA:VNM) stock markets were all well in the black this year until the latest market skids started a month ago. They still substantially outperform global tracker EEM. Look for a bounce back when investors’ mood improves.
So investors need to be careful. The asset class looks wonderful if you look at the iShares MSCI Frontier 100 ETF (NYSEARCA:FM), which has gained 9% year-to-date and lost a mere 4% over the past dismal month. But this is really a Middle East regional fund with its big holdings concentrated in Kuwait and Qatar. Those Gulf states may continue to be a good bet so long as they keep the Arab Spring at bay, but buyers should understand that they are not investing in some diversified global portfolio.

Another relatively popular vehicle, the Guggenheim Frontier Markets ETF (NYSE:FRN), focuses almost exclusively on Latin America, with top holdings in companies like Ecuadorian oil driller Ecopetrol SA (NYSE:EC) and Latam Airlines Group SA (NYSE:LFL). This strategy has proved far less effective recently: The fund has lost 21% this year.

The moral: Not all frontier markets are created equal. Watch what you actually buy.
None of these markets may be a screaming buy this week. But once the Street and City realize that a rebounding America is not all bad, they may return better than the old knee-jerk emerging market investments.
No positions in stocks mentioned.

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