Market Watch 2011 – Investing in Emerging Markets

by Dan Harrington on April 13, 2011

Investor Economic Report – Emerging Markets 2011

It’s no secret that emerging economies are growing rapidly while developed countries such as the U.S. are experiencing significant economic problems.

Countries such as India, China, South Korea, Indonesia, Brazil, South Africa, Russia as well as Nigeria, Egypt, Mexico, Bangladesh, Turkey, the Philippines and Vietnam have seen great growth and continue to show a high potential for future growth. For this reason it makes sense for investors to including emerging market equities in their portfolios.

Emerging Market Growth Outpacing United States

The pace of growth in emerging markets has far exceeded the United States in the last few years, and nearly half of the global GDP growth is from emerging markets.

In the past five years the market cap of the MSCI Emerging Market Index has increase more than two hundred percent. World Bank estimates have placed the growth of major emerging markets at around six percent while the developed countries are forecasted to see only about 2.5%.

The emerging markets are also spending a great deal on infrastructure improvements as well as healthcare and other investments along with growing urbanization while that growth has seen a relative stagnation in developed countries.

In developed countries like the United States the crash of the housing boom, the credit crisis and recession have lingered on with many predicting a double dip recession.

Weakening US Dollar Creates Higher Commodity Prices for Americans

Meanwhile the U.S. has amassed a huge new amount of debt while emerging market debt is decreasing. U.S. consumer spending is lower due to the economic conditions while emerging markets have large and growing middle classes with more disposable income, including for “affordable luxuries” such as fine Arabica coffee beans to brew Gourmet Coffee Drinks like Cappuccinos and Lattes.

In China the growth in coffee consumption in recent years has been estimated at around twenty percent annually which is far higher than the worldwide two percent annual growth in coffee consumption.

Market Watch 2011 – Investing in Emerging Markets continued:

In recent years emerging markets including China, Brazil and India the number of patents granted and the degree of innovation and research has been rising and this continues in 2011.

During the last few years trade has been increasing between developing countries (e.g., China and India) has been increasing rapidly while trade between the U.S. and emerging markets (e.g., India) has actually been decreasing overall.

Diversifying Your Portfolio With Emerging Markets

To diversify your portfolio with emerging market stocks one first needs to appreciate that these developing markets traditionally involve a degree of risk and volatility.

It is important to make the distinction between an international or global stock and emerging market stocks. Emerging markets have an established industrial base which manufactures and markets goods to its own people as well as globally, and a population with an increasing wealth increasingly more able to purchase goods.

The term emerging markets refers to the countries’ economies as well as their stocks and companies.

Emerging Markets Provide Safety Net In Your Portfolio

Diversifying your portfolio with emerging market stock holdings is also smart in the sense that history has shown that European and United States’ stocks often move in the opposite direction of emerging markets and thus owning both provides somewhat of a safety net that will even out losses with consequent gains.

Investing in Emerging Markets – Market Watch 2011 continued

One way to diversify your portfolio with emerging markets in 2011 is to purchase stocks of companies in developing countries. Since this is time consuming to find the right company, a better option is to invest in Exchange Traded Funds (e.g., iShares MSCI Turkey [TUR]; PowerShares India (PIN); iShares MSCI South Korea [EWY]).

The main advantage of an Exchange Traded Fund (ETF) is its smaller expense ratio as compared to an emerging market mutual fund. Purchasing an ETF which follows the companies in a certain country that you think will be strong is a good way to diversify your portfolio.

Exchange Traded Funds That Include A Diversity of Emerging Markets

To gain even more diversification in emerging markets choose an ETF with diversified stocks from different developing economies.

One popular developing country ETF is the iShares MSCI Emerging Markets Index (EEM) which is invested China, Latin America, Taiwan, South Africa, South Korea and Brazil. Another option is the Vanguard Emerging Markets (VWO) or the Dow Jones Emerging Markets Composite Titans Index Fund (EEG).

ETFs and mutual funds (e.g., iShares JP Morgan Emerging Markets Bond [EMB], Fidelity New Markets Income [FNMIX], PowerShares Emerging Markets Sovereign Debt [PCY]) can also be used to invest in the bonds of emerging markets though consumers are cautioned to be ware of the bond grade.

Market Watch 2011 continued:

Vanguard and Fidelity are among the popular mutual funds as is T. Rowe Price. Most mutual fund companies have emerging market funds. You can choose from large and small caps, and you may invest in either growth or value, similar to United States mutual funds.

Bernstein Emerging Markets (SNEMX), Vanguard Emerging Markets Index (VEIEX) and DFA Emerging Markets Value Fund (DFEVX) are among the many emerging market mutual funds you might consider.

Fundamental Change In Commodity Markets Driven By Emerging Markets

Large infusions of money into commodity markets has been attributed in part to current easy money credit policies that have devalued the US dollar due to huge new amounts of debt.

Meanwhile emerging markets are driving a huge new demand for commodities creating the underlying fundamental market forces that are driving up commodity prices worldwide.

For example, coffee consumption is rising rapidly in emerging economies – including China, Brazil, India, Latin America and Russia – which are now competing for the best Arabica beans with the U.S. and Europe, driving up coffee prices.

Investing in Emerging Markets in 2011 continued:

Coffee futures have more than doubled in the last year and the trend toward increasing prices continues as poor harvests and other problems hinder coffee production.

This holds true for a whole range of agricultural commodities that have seen price spikes due to supply disruptions including sugar, wheat, rice, soybeans, corn and cotton.

Thank You for Visiting Gourmet Coffee Lovers and Reading Market Watch 2011 – Investing in Emerging Markets. Love Your Gourmet Coffee!

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