CHICAGO, APRIL 30 – The worst advice on emerging
markets is to go out and buy the best-performing funds or
countries of last year. In most cases, the hot money has come
and gone and you can’t buy yesterday’s gains. But you can invest
in a wide basket of developing countries to build a more robust
portfolio foundation.
That’s not to say that emerging markets aren’t worthwhile.
For global investors in the past decade, it’s been accepted
wisdom that investing in the BRIC countries of Brazil, Russia,
India and China is the basis of a strong strategy. While that’s
still somewhat true, it’s not monolithic. Russia has had its
setbacks and India is slowing down. China’s economy has
increasingly raised the concern of international analysts.
But what’s left? Jim O’Neill, the chairman of Goldman Sachs
Asset Management who coined the BRIC acronym a decade ago,
suggests expanding your horizons to include Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines,
South Korea, Turkey and Vietnam.
Global wealth seems to be moving to locales that have not
been traditionally seen as bastions. While London and New York
are still holding their own, high-net-worth individuals are
investing in off-the-beaten track cities like Nairobi, Jakarta,
Vancouver, Tel Aviv, Kiev and Cape Town. That’s according to a
recent Wealth Report prepared by Knight Frank and Citi, which
tracked global residential and commercial property hotspots ().
Countries that have benefited from money moving from
first-tier developed nations into emerging economies include
Thailand, Colombia, Indonesia, Malaysia and Singapore. According
to an analysis by Lipper, a Thomson Reuters company,
exchange-traded funds that invested in those countries easily
trounced the BRIC strategy over the past three years through
April 20.
Single-country targeted funds include the iShares MSCI
Thailand Investable Market Index ETF, which led the pack
of emerging markets ETFs with a 47-percent three-year return,
Lipper found. The Global X FTSE Colombia 20 and Market
Vectors Indonesia Index returned 42 percent and 41
percent, respectively, for the period.
How did these developing countries compare with a BRIC fund
such as the Guggenheim BRIC fund. The exchange-traded
fund returned a respectable 18 percent for the period, although
it was less than half of the performance of the high flyers.
Broader, more conservative portfolios make more sense. Consider
the PowerShares FTSE RAFI Emerging Markets Portfolio if
you want to slightly underweight China, which dominates most
ETFs specializing in emerging markets. The WisdomTree Emerging
Markets Equity ETF has more than three quarters of its
holdings in Latin America and Greater Asia.
O’Neill insists that the BRICs are still headed for
explosive growth long term. In terms of relative GDP growth and
size, “China produces another India every 18 months or another
Italy every 15 months,” O’Neill said at a meeting of the Chicago
Council on Global Affairs on April 26. O’Neill’s likely right
about BRIC growth – if current trends continue.
But a global economic retrenchment is still possible,
especially when you watch the debilitating euro zone austerity
measures and the inability of the U.S. Congress to cut its
growing budget deficit. And China is actually one possible
weakening link in the BRIC strategy. The world’s most populous
country is still on track to become the world’s largest economy
in the next two decades or so, but its ascent may not be a
clean, straight line.
A recent report by BlackRock, Inc., which manages
more than $3 trillion in assets, suggests that China may
encounter some rough patches, although it didn’t predict how
these gremlins will slow the burgeoning Chinese economy ().
BlackRock’s analysts pointed to China’s real estate slump as
the “biggest threat to economic growth and confidence in 2012.”
The firm said research from the Peterson Institute showed that
real estate accounted for some 40 percent of urban household
wealth in 2010 – double what it had been in 1997.
Did China overbuild and create a bubble? The BlackRock
report isn’t definitive, although it noted “we struggle to find
a precedent in history where the bursting of the bubble did not
lead to financial distress.” The researchers also highlighted
other red flags such as an explosion in credit growth, its
undervalued currency relative to the dollar and the slow move
toward a consumption economy.
Slower global economic growth, though, remains the major
roadblock to BRIC countries. Energy-rich Russia felt a big pinch
as its gross domestic product growth rate slowed to 3.2 percent
year-over-year in March, down from 4.8 percent in February.
Brazil, which is still expanding due to its natural resource
wealth, recently cut benchmark interest rates in an attempt to
revive its sluggish economy, which once was keeping pace with
China’s 7-percent-plus rate. India is faring even worse with the
credit ratings agency Standard and Poor’s downgrading India from
“stable to negative” in light of the country’s growing deficit
and diminishing growth.
So to truly internationalize and balance your portfolio, you
need to move beyond the BRIC strategy to find robust growth in
smaller, overlooked countries. A broader-based approach, which
is what I employ in my portfolio, will net you more growth.