Related topics: Brazil, China, Jim Jubak, India, stocks
Be careful what you wish for.
A lot of investors have watched this year as emerging stock markets have left their portfolios in the dust.
From May 20 through Nov. 5, the Brazilian stock market -- measured by the gains on the iShares MSCI Brazil Index (EWZ) -- was up 38.5%.
The Indian stock market, measured by the BSE Sensex 30 index, was up 28.2% from May 26 through Nov. 5.
The Chinese stock market, measured by the Shanghai SE A share index, was up 33.6% from July 5 through Nov. 8.
If only, many of us wished, these markets would dip so we could get in.
Well, since those November highs and through Nov. 30, the Brazilian market was down 7.8%, the Indian market down 7.1%, and the Shanghai market down 12.1%.
And suddenly all those investors who were clamoring to buy at ever-rising prices are pulling money out of markets that are decidedly cheaper than they were just three weeks ago. In India, for example, foreign investors have taken $158 million out of the markets since Nov. 12.
That's quite a reversal from the $5 billion that these investors put into Indian financial markets in the first 12 days of the month.
Jim Jubak
Running from opportunity
On Nov. 29, I wrote a piece arguing that in the short run -- the next few weeks or months, maybe even a quarter or two -- the U.S. stock market is likely to be the best-performing market in the world because 1) the U.S. economy is likely to deliver the best performance in the world, and 2) the world's other stock markets and economies show huge near-term problems. In that time period I think you want to own U.S. stocks, and in that post I mentioned nine possible buys to enjoy short-term U.S. relative advantage. (See "9 good bets on the U.S. economy.")
But what about the longer run? However you define "longer term," I think that emerging-market stocks, along with developed-economy stocks with big emerging-economy exposure, will outperform stocks from the world's developed economies. Three reasons:
- Demographics. The emerging-market countries are generally younger and don't face (for a couple of decades anyway) the big drag of rising health care and retirement costs from a quickly aging population.
- Economic growth rate. China is growing at 10%, India at 8%, Brazil at 7%. The United States would sell the Mall of America for 3% growth. The European Union will be lucky to see 2%. Japan?Fiscal balances. The United States, Spain, Ireland, the United Kingdom, France and Japan all face huge budget deficits and debt overhangs that threaten their credit ratings and will raise the cost of capital for those countries. The emerging economies are going in the other direction, with improving credit ratings and falling interest rates in the long run.
- Fiscal balances. The United States, Spain, Ireland, the United Kingdom, France and Japan all face huge budget deficits and debt overhangs that threaten their credit ratings and will raise the cost of capital for those countries. The emerging economies are going in the other direction, with improving credit ratings and falling interest rates in the long run.
So, instead of running for the hills because Shanghai is going through one of its frequent corrections or because business scandals have put the Mumbai stock market into reverse, investors ought to be using this dip as a chance to add emerging-market exposure to their portfolios.
Just a few little questions to answer first: When? At what price? And what?
A 6-month window
There are two ways to go about deciding when.
The first involves making a reasonable estimate for how long the current troubles sending emerging-markets stocks lower will last.
So, for example, you can estimate that a good part of India's dip will be over when the current wave of business scandals passes. The biggest of these, the 2G scandal, has led to the resignation of India's telecommunications minister over charges that some of India's biggest wireless operators got more spectrum than they had paid for. Market-shaking scandals with life spans of even three months are rare.
India's other problems -- overvaluation in the stock market (Sensex stocks sell for 18.8 times reported earnings, a big premium to the stocks in Brazil's Bovespa index at 13 times), inflation that will require more interest-rate increases from the Reserve Bank of India, and a big balance of payments gap -- will take longer to work out. But I'd guesstimate that you'd probably want to be back in the Indian market by mid-2011.
Brazil's problems seem both limited to a few months and maybe extended for six months or so. In the short run, I think the financial markets are currently testing President-elect Dilma Rousseff to see if she is committed to fighting inflation and to reducing (or at worst holding steady) the size of Brazil's public-sector work force. The judgment on that will be in by March or so. In the slightly longer run, Brazil's big challenge is actually getting inflation under control without stomping on the brake so hard that it kills economic growth. We should be able to judge the efforts of the Banco Central do Brasil on this front by June.
The big dog among emerging markets is, as always, China. While it is possible for an emerging stock market to go up when China's stocks are going down or nowhere -- see the performance of India's Sensex index at several points this year -- it's not easy. The best guarantee for a rally in emerging-market stocks remains an end to the worries that ended the impressive July-to-November rally in the Shanghai market.
What are those worries? And what's a reasonable timetable for putting them to bed?
