Emerging Markets Will Roar in this New Year (5 Jan 2010)

It’s a new year, I added $5,000 to my portfolio as follows:

Schroder ISF Latin America A ACC SGD - $1,000
LionGlobal Korea Fund - $3,000
Fidelity Eur Hy (EUR) - $,1000

Within Asia, South Korea is our favorite market for this year. But as a whole, I really like Emerging markets, and since I am already heavily overweight Asia, I added to Latin America to increase my exposure to other emerging markets outside of Asia.

I think markets are already off to a great start in 2010.The STI index is closing well above 2,900 points, and the Hang Seng Index has also breached 22,000 points. A lot of people are looking at markets with a new fresh perspective, and they are feeling positive about it.

Personally, I don’t just feel positive, I am very bullish. In particular, on Emerging Markets. Here’s why: a lot of the concerns, are still about what is happening in developed countries. What happens when governments pull back on stimulus spending at the end of the year, what happens if the US economy goes into a double spin? What happens if US dollar crashes. The thing is, we had just gone through an extremely difficult 2009, where demand from developed markets fell drastically, the world was in a recession, etc, and through it all, the emerging economies just kept on chugging away.

So, if all these ongoing risks are centered on developed countries, then shouldn’t the people in the emerging markets feel a lot more confident? A lot of people claimed that because emerging markets, in particular Asia suffered massive falls in 2008 as developed markets slumped, there was no decoupling. This is true, to a certain extent. We live in a massively linked up world and it would be impossible for things happening in the developed world to not have an impact elsewhere.

However, as seen in the much stronger rate of rebound from Asian and emerging markets last year, there is now a difference emerging. The US and Europe banks will take some time to right themselves, and similarly, the housing boom fueled by subprime mortgages, now bust, will also take some time for US and Europe home owners to sort through. In the meantime, Asia, and the rest of emerging markets, will simply rebound faster, and forge ahead harder.

Many of the emerging market economies did not need the huge influx of help from government stimulus packages, nor did they have the luxury of such much cash injections. Their banks didn’t need the kind of bailouts that US and European banks needed either. This feared withdrawal of government stimulus packages will hardly have much impact on Asian and Emerging economies at all. Truth to be told, one year is a long time anyway, and I am confident that by the end of the year, most of the businesses in developed countries will be back on their feet as well already. The true economy will take over from there. By the end of 2010, it would be two year since Lehman Brothers crashed. If we still need government stimulus packages to keep economies going by then, we will be in trouble.

I foresee more economic power shifting to the emerging economies. The emerging market economies, led by the giants India, China, Russia and Brazil which together, make up more than 40% of the world’s population are in a unique position. Many have young populations, a much lower cost base, low household debts and strong companies with healthy balance sheets. This is in contrast to many developed countries which are struggling with a graying population, high household debts, and companies with big holes in their balance sheets.

Interest rates and inflation numbers are at abnormally low rates in 2009 because of the global recession. It will not always remain so low. Yet, an inflationary environment will also benefit resource rich countries like Russia and Brazil. (And China has massive oil companies which have been aggressively acquiring energy resources as well). With the stronger economic growth, we are expecting strong earnings growth of around 29% for 2010 from Emerging Markets. And even 2011 will see earnings growth rates of 19.5% as well. And yet, valuations of many emerging market countries remain reasonable. (Russia and Brazil are trading at P/E ratios of below 14 times).

This doesn’t mean developed countries are about to roll over and die. I am probably more hopeful about them recovering than many simply because when we are talking about markets, we are talking about the companies listed in these markets. These are all run by smart people. They know where the growth is. Global companies will all be trying to expand into emerging markets, where the potential for growth is so much greater. Those that succeed will benefit from it as well.

For those of you who are already invested, I hope you have rebalanced your portfolio. I think this year will be a good one, so its ok to take a bit more risk. For those that have not and are wondering if it is still alright to get back into markets. Yes, it is. We are only at the start of 2010. Markets will not shoot up 30% within two weeks. So, there is still time, but of course, the longer you wait, the higher market will move up. Don’t wait until everyone is already in the market, and nobody is worried about government exit plans, or double dip recessions anymore. There are still decent gains to be made this year.