Emerging markets have had a hard time of it lately. The
iShares MSCI Emerging Markets ETF
(NYSEARCA:EEM), which tracks the asset class globally, plunged by
more than 6% in five trading days before catching a bit of a bounce
late last week. The epicenter of the panic was in Indonesia, India,
and other Asian markets. But aftershocks were felt everywhere,
across countries with completely different economic drivers:
Brazil, Nigeria, Turkey, you name it.
Well, not quite everywhere. Eastern Europe, the runt of emerging
markets regions by volume, proved the stoutest during last week's
bloodbath. The most liquid ETF for the Polish market,
iShares MSCI Poland
(NYSEARCA:EPOL) is back to where it was before the stampede started
on Aug. 14, and shows a 20% gain over the last 12 months. The
NASDAQ OMX Baltic Index-uniting the reviving economies of Latvia,
Estonia, and Lithuania -- sold off by less than 1% and is also up
20% from a year ago. EEM has about broken even since Aug. 2012.
There are reasons for the ex-Soviet Bloc's outperformance. The
common, rather hastily patched-together explanation for the rout
elsewhere is that developing countries, like US consumers and
homeowners before 2008, have been living beyond their means on
cheap credit. They have used global capital, which was desperate
for some kind of return faced with pathetic interest rates back
home, to import more than they exported, running up what economists
like to call current account deficits.
This logic is itself a bit questionable. The current account
deficit of Indonesia, the markets' whipping boy of the moment, was
2.4% of GDP last year, according to the CIA World Factbook. That
compares with 3.1% for the USA. But that is a question for another
day. To go on with the standard narrative, investors' "hot money"
is now fleeing back to T-bills whose return has been boosted by the
rumor of rising US interest rates. Emerging markets are being
yanked off their steroids, and their currencies are destined to
sink as capital goes home to the almighty dollar.
But Poland and the rest of Eastern Europe are removed from this
T-bill-Hot Money axis. They belong to Europe not only in name, but
politically and economically as well. And rightfully or not, Europe
is back in vogue among investors, its Euro Stoxx 50 index rising
more than 15% over the past year.
Economically, Poland is essentially a province of Germany, but with
rather more pep. Its economy grew by 2% last year, while the giant
western neighbor eked out 0.7%. Germany gobbles up one-quarter of
Poland's exports and other European neighbors most of the rest. The
Polish zloty has traded for years within a tight range (5% up or
down) to both the euro and the dollar. With unemployment above 12%,
Poland has plenty of economic slack to pick up if Germany, as
expected, regains its economic mojo. (The country grew by more than
3% in 2011.)
One more emerging market that kept its cool during the August
meltdown was Russia. The value of the commonly traded
Market Vectors Russia ETF
(NYSEARCA:RSX) is just a hair off where it was on Aug. 14.
That should not be surprising either. One problem Russia, the
world's largest oil exporter by far, does not have is a current
account deficit. It racked up an $81 billion surplus last year, the
world's fifth largest. With oil prices settling in comfortably
above $100 per barrel, nothing seriously threatens that dynamic,
and its beaten-down ruble looks rather undervalued. It sounds like
a safe haven from turmoil in more thinly capitalized nations.
The problem with Russia is that it's … Russia. It has some
excellent private companies, like food retailer
(MCX:MGNT) or cell phone provider
), that continue to deliver outstanding returns despite a
macroeconomic slowdown. But the index, and thus the available ETF,
is dominated by sclerotic state or proto-state giants like
(OTCMKTS:LUKOY), where long-entrenched management seems well beyond
even the pretense of self-improvement.
So without a sharp upward jolt in energy prices, which seems
unlikely for many reasons, the market is likely to remain static.
The immediate future is also rich with possibilities for more
misanthropic actions by Russian President Vladimir Putin - from
undermining whatever Western action might be coming in Syria, to
quashing dissident Moscow mayoral candidate Alexei Navalny in case
he does better than expected in early September's election.
Poland, the Baltics, and the Czech Republic, whose main index has
reversed weak performance with a 10% run in July and August, look
like a better bet. They will mirror a recovering Europe, and then
Sorry, Investors, You're Wrong About Emerging