Take the fashionable growth markets, the BRICs – Brazil, Russia, India and China – for example.
It’s been 10 years since Chairman of Goldman Sachs Group Inc. (NYSE:GS) Asset Management Jim O’Neill coined the BRIC acronym. His recommendation was certainly effective – one of the best of all time, even. But today, all four BRIC countries face problems, and their troubles illustrate the dangers of following investment fashions.
Just take a look:
- China appears the least troubled of the four BRICs. However, it looks to be facing a recession, inflation is approaching double digits and there is a massive bad debt problem in the banking system. Too much money has been invested in uneconomic rubbish – “malinvestment” as the Austrian school of economics calls it. My own guess is that China will do fine long-term but you probably don’t want to invest until the size and shape of its problems is clear.
- India has a government that can’t stop spending, inflation over 10% and huge corruption. Furthermore, its stock market is still pretty inflated. I wouldn’t put much money there until the government changes. Contrary to what you read in the media, almost all the real liberalization progress came under the Vajpayee government of 1998-2004, which the Indian electorate then ungratefully threw out. I’d want an Indian government without the corrupt socialist Congress Party before I’d invest; only then could I be sure that Indian gains would not be poured down a rat hole.
- Brazil has been run by big-spending socialists since 2002 and has been immensely lucky to benefit from the commodities boom. Now the boom has topped out (probably temporarily) but its government is still overspending and has begun to harass foreign investors. Brazil is in big trouble if commodities prices fall.
- In Russia, Vladimir Putin will become President again next March. Need I say more? Like Brazil, Russia has benefited immensely from the commodities boom (in its case, primarily the run-up in oil prices). However, it treats foreign investors even worse than Brazil does, it is even more corrupt and it appears to be running out of money.
If the BRIC’s prospects are bad, those of much of Europe are even worse.
The Eurozone’s debt problem could have been solved early on by throwing Greece out of the euro (a much deserved punishment). However European authorities have now thrown so much money about in such unproductive ways that it’s doubtful whether the euro is even salvageable anymore.
A recession in 2012 seems unavoidable, although Germany may benefit from the problems of its trading partners (if it is not forced to bail them out). Well-run European Union (EU) members that are not part of the Eurozone, such as Poland, may also benefit from the chaos, although Poland’s current foreign minister Radek Sikorski doesn’t seem to think so.
Japan has done so badly for so long that it may be impossible to revive. If public debt were still at the level of a decade ago, Japanese shares would be a screaming buy, as the market is at a quarter of its 1990 peak. However, with debt around 220% of gross domestic product (GDP) and no sign of the country’s budget problems being solved, it may be nearing the point of no return and eventual debt default. On the whole, it’s best avoided.
Apart from the United States, that leaves one obvious rich-country market, Canada, and some emerging markets of East Asia and Latin America likely to come out on top. (Australia is currently badly run, and looks likely to “kill the goose that laid the golden eggs” by taxes and environmental regulations.)
Canada and Chile are well run and benefit from current high commodity prices. Malaysia does, as well, while South Korea and Taiwan would benefit from a fall in prices. And Singapore does well in all environments except a major world slump, which I don’t expect.
The best way to invest in most of these markets is through exchange-traded funds (ETFs).
For Canada that’s the iShares MSCI Canada Index ETF (NYSEARCA:EWC), with net assets of $5 billion and a price/earnings (P/E) ratio of 14. For Chile, there’s no ETF, but the Aberdeen Chile Fund (NYSEARCA:ECH) is well run, although small with a market capitalization of $130 million. For Malaysia, the iShares MSCI Malaysia Index ETF (NYSEARCA:EWM) has net assets of $929 million and a P/E of 15. As a hedge against a commodity price crash, look at the iShares MSCI Korea Index ETF (NYSEARCA:EWY) and the iShares MSCI Taiwan Index ETF (NYSEARCA:EWT).
If that’s not enough, however, there is one more emerging market that’s positioned to do very well in 2012. It is well governed, has ample natural resources, and is currently planning a huge infrastructure build-out. That makes it a prime investment opportunity. However, that recommendation is only available to Money Morning Private Briefing subscribers.
If you’re already signed up then you can read all about it in today’s issue. If not, then I highly recommend you sign up by clicking here. That way, in addition to today’s pick, you’ll receive dozens of other top-tier recommendations.
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
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