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Emerging Markets: More Than a Flash in the Pan?


Outperformance shows investors are taking on more risk.


Emerging markets are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are now outperforming the developed ones is a sign that global investors are beginning to take more risk - a necessary ingredient for stock markets in general to improve further.

Emerging-market equities have outperformed mature markets by 31.2% from the November lows. Further evidence comes from the tables below, showing the performance of the MSCI World Index and the MSCI Emerging Markets Index, together with a few individual emerging-country indices, over various measurement periods and in both local currency and dollar terms.

I'd expect the outperformance of emerging markets to be more than a flash in the pan, as China and other developing nations will be the first to emerge from the economic slump -- probably this year -- and will again spearhead global growth in 2010 and beyond.

I share David Fuller's (Fullermoney) viewpoint that too many analysts and strategists risk myopia in their focus on Wall Street, particularly regarding upside leads for global stock markets.

"The US stock market is the classic Rolls Royce on the racetrack - impressive, comfortably large, but no longer a high-performance machine. Unfortunately, it has suffered from some dodgy mechanics in the last 2 decades. In contrast, the Ferraris, mostly from Asia, are inevitably first at the start of a new bull market. They will also lap Wall Street during the uptrend. The trade-off is that they are also prone to the more spectacular crashes when overdriven."

Although many countries are overbought at the moment, solid base formations have developed over the past few months and investors should keep an eye on pullbacks for buying opportunities. Emerging Asian markets, notably China, resource-rich nations like Brazil, and India are at the top of my buy list. The trading range charts of the benchmark indices of these countries are shown below (courtesy of Bespoke).

The recommended countries can be accessed through the following exchange-traded funds (ETFs):

  • China: iShares FTSE/Xinhua China 25 Index (FXI)
  • Brazil: iShares MSCI Brazil Index (EWZ)
  • India: iPath MSCI India Total Return Index ETN (IPN)

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No positions in stocks mentioned.
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