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Global Sell-Off Strategy: Blend Winners and Losers (TUR, EPU, EEM, EWM)

August 26th, 2011

No question, the global stock sell-off has been brutal, hitting high-quality growth markets and weak performers alike. But while global emerging markets as a group, via the iShares MSCI Emerging Markets Index (NYSE:EEM), are down about 12 percent so far in 2011, a few countries are bucking the downtrend and remain in positive territory. Let’s look at why these countries (and the country ETFs that track their markets) are outperforming. Then, we’ll turn to two markets down more than 25 percent so far this year despite red-hot growth rates.

Are these markets oversold and coiled for a bounce back?

Southeast Asia Growing, Yet Risky


It’s no surprise that the region demonstrating the best relative strength is south of China and east of India – Southeast Asia. I’ve already beaten the drum hard for investors to target this booming region based on its growth prospects, attractive demographics, a growing consumer class, low levels of corporate and government debt, ample natural resources and strong exports.

Leading the way is Indonesia and the Aberdeen Indonesia Fund (AMEX:IF), up 13 percent so far this year, while Malaysia and Thailand, and their respective iShares MSCI Malaysia Index Fund (NYSE:EWM) and Thai Capital Fund (AMEX:TF), also remain in the black for 2011.

Indonesia, as the third-largest democracy with the fourth-largest population in the world, has been my favorite emerging market growth story for some time. It continues to demonstrate strong growth, has the fastest-growing middle class in Asia, and is the only country in the G-20 that has declining debt to GDP. A huge plus is that domestic consumer spending accounts for 56 percent of the economy, insulating it a bit from any global recession. The biggest risk to Indonesian growth is poor infrastructure – Jakarta traffic just a complete mess.

Indonesia, like Thailand and Malaysia, is also benefiting from manufacturers looking to diversify away from China as its wages and other costs make it less competitive.

As Gita Wirjawan, Chairman of Indonesia’s Investment Coordination Board, told the Financial Times recently: “When I was in Seoul, there was a queue of manufacturing giants showing a thirst to relocate, or move their manufacturing hub for Southeast Asia to Indonesia.”

Some evidence? In one of the largest deals this year, Posco, South Korea’s biggest steelmaker, recently signed a $6-billion agreement to build a plant in Indonesia with PT Krakatau Steel.

Malaysia represents sort of a “middle” emerging market with a lower-risk profile and growth rate. You can expect a consistent and solid four- to five-percent growth rate supported by a vibrant middle class with a per capita income above $12,000.

Last year, foreign investors pumped $9.1 billion into new factories and operations, and a World Bank survey ranks Malaysia twenty-first out of 183 economies globally for the ease of doing business. All this good stuff leads to Malaysia’s enviable three-percent unemployment rate.

Battered Emerging Markets to Make a Comeback?

We have to put Turkey, and the iShares MSCI Turkey Investable Market Index (NYSE:TUR), at the top of the list. It’s been slammed 40 percent since May 1 despite an 8.5-percent growth rate in 2010 and an even hotter 11-percent growth rate in the first quarter of this year.

It seems the economists out there think this is too much of a good thing. They’re flagging a widening trade deficit and the fear of higher inflation. In addition, although Turkey isn’t part of the Eurozone or European Union, there’s concern about Europe’s problems spilling over into Turkey.

Actually, one of Turkey’s strengths is that it sits at the crossroads of the Middle East and Europe and is a powerhouse in many markets.

Turkey has a young and sophisticated population of 80 million and a debt to GDP of about half of America. In many ways it’s the Germany of the Middle East, with twice as many billionaires as Japan and is one of BMW’s top growth markets.

Peru, and the iShares MSCI All Peru Capped Index (NYSE:EPU), is another market getting kicked in the teeth after losing 25 percent of its value this year. Still, its economy grew five percent during the first six months of 2011. It’s a major metals producer with six percent of world gold production. (Peru is the second  largest producer of copper and among the top five silver and lead miners.) The recent election of President Ollanta Humala has rattled markets given his left-leaning background, but his cabinet selections since then have signaled that he recognizes the need to rule from the middle.

Perhaps the best way to respond to global market sell-offs is to buy markets at the extremes. Adding a dash of Indonesia and Turkey to your global portfolio right now may seem too aggressive, but it might pay off big down the road.

Good investing,

by Carl Delfeld, Investment U’s Senior Analyst


NYSE:EEM, NYSE:EPU, NYSE:EWM, NYSE:TUR


 

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