CNBC posted a very bearish headline from Bob Janjuah of Nomura
500 Facing 25% Drop Before US Election: Janjuah
. He expects the S&P to trade at or below the lows of
2011, which is dollar bullish, as the "risk-off" trade returns
and also positive for government bonds. How will emerging markets
Janjuah is not alone in his conviction the S&P 500 is
possibly headed down. The US presidential election is coming and
the uncertainty preceding this election coupled with a sour
economy and the looming "fiscal cliff" will undoubtedly
drive some investors to the exits.
But if such a sell-off were to occur, what would then drive
U.S. stocks back higher? Those companies generating revenue
and profits from emerging markets. It is always helpful to see
where the smart money is going. A recent article published by
provides useful insight.
The private sector part of the World Bank, the International
Finance Corporation (IFC), has
invested $805 million in projects around the
world through Australian companies in emerging markets
. 24 countries are home to the projects which involve diverse
sectors including financial services and infrastructure, among
others. Three Macquarie Group (
) sponsored infrastructure funds are part of the total, with the
IFC investing in India, Russia, and Africa.
Reportedly Australian companies are increasingly investing
outside their borders for growth opportunities, particularly in
emerging markets. The IFC has more traditionally worked with
European, Japanese, and American companies and banks in developed
countries. The global financial crisis changed that, with the IFC
now working more commonly with Australian and Asian companies.
Included are more Korean, Indian, and Chinese companies. Through
cooperation with these companies the investments are further
diversified in other emerging markets including Africa.
The IFC has been integral in assisting emerging markets
companies invest in other emerging markets. In one instance the
IFC helped Singaporean companies invest in ports in Africa, and
aided India's Exim Bank in providing trade finance for Bangladesh
and other countries. The IFC committed $5 billion to projects
last year and expects to exceed that this year.
The IFC's efforts to aggressively invest and develop
cooperative investment projects in emerging markets directly and
through investment in developed market companies expanding into
emerging markets is a distinct identifier of the ongoing
opportunity there. The evidence is significant that not only
quasi-governmental banking institutions like the IFC are
mobilizing funds to take advantage of opportunities in emerging
markets, but that banks worldwide are doing the same.
Financing activities and direct investment by the IFC is a
very good indicator, and various ETFs exist to
invest directly in banks from emerging market
, as well as developed market banks investing heavily in emerging
According to McKinsey & Company, the biggest 100 companies
in the S&P 500 derive only 17% of their revenue from emerging
markets. This despite 36% of global GDP being produced by
emerging market countries. Clearly investors in U.S.-oriented
companies and funds are missing a piece of the action.
But given the current pessimism for U.S. stock indexes like
the S&P 500, and the still high correlation between emerging
stock markets and the S&P500, it may benefit investors to
focus on highly liquid ETFs like
For those holding illiquid ETFs in specific industries like
banking and financial services, extra attention should be paid to
them. If a big market sell-off in the S&P 500 occurs it is
reasonable to assume many equity positions worldwide will follow
suit, at least temporarily. In a fast declining market those
illiquid securities are harder to get rid of. So before the time
comes, reevaluate your holdings and make sure you are truly
willing to weather a potential storm.