Two Countries Bucking The Investment Outflow Trend In Latin America And Asia (RSX, EPU, EWJ)

With higher oil prices suddenly driving market sentiment again, Capital Economics estimates that if oil cracks the $130 level, it would cost American consumers more than $100 billion this year alone.

And those fears aren’t just playing out in America…

~ In Turkey: The stock market got pounded last week, as investors worried that the jump in oil prices will swell its already bloated trade deficit even further (the deficit was 3.5% of GDP in 2010).

And you can see why, given that the biggest contributors to the trade deficit include energy (crude oil, natural gas, and coal), chemicals, petroleum products, and machinery. Together these items accounted for about 87% of Turkey’s 2010 trade deficit.

~ In Russia: The Markets Vectors Russia ETF (NYSE:RSX) has about 50% exposure to energy, but despite the jump in oil prices, it’s only trading marginally higher so far this year. Be careful with RSX, as high political risk and corruption make it an uneven proxy for oil prices.

Latin America and Asia See Investment Outflows… But These Two Countries Are Bucking the Trend

Meanwhile, there are growing concerns about the jump in consumer credit in Brazil, which makes up 40% of Latin America’s total GDP.

Over the past five years, credit growth has run at 2.4 times its GDP – double that of China at 1.2 times. More worrisome is that consumer credit comes with very high interest rates. Banks in Brazil charge an average lending rate of approximately 25% – even though the country’s inflation rate is running around 6%.

This is one factor that has led to Latin American and Brazilian equity funds suffering their sixth consecutive week of investment outflows.

The trend-bucker? Peru. Benefiting from being a leading gold and silver producer, the country notched its fourth straight week of inflows. You can invest in Peru’s emerging market through the ETF that represents it – the iShares MSCI All Peru Capped Index (NYSE:EPU), but keep in mind that the country is currently in the midst of a competitive presidential election cycle.

Elsewhere, China Equity Funds both posted their fifth straight week of outflows, as Chinese authorities again hiked bank reserve requirements and consumer confidence fell to its lowest level in over a year.

But there’s a trend-bucker in Asia, too – and it comes in the shape of Japan. The country continues to roll, with 15 consecutive weeks of net inflows – the best run for four years. Investors are aiming to take advantage of a strong run for stocks – Japan’s broad Topix index is up almost a fifth since the first week of November. An easy way to play the Japanese market is through the iShares MSCI Japan Index (NYSE:EWJ).

Good investing,

by Carl Delfeld, Global Equities and Emerging Markets Specialist

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