Emerging markets show strength


Many traders have been surprised by the stock market's strength in recent weeks, expecting that the poor employment picture and lukewarm U.S. recovery would send equities lower. However, their focus on known problems in the United States and Europe have caused them to miss many overlooked strengths in other countries such as Malaysia, Peru, Brazil, and Singapore.

Let's be honest. For most investors, these countries are the answers to the blue geography questions in Trivial Pursuit. For decades they where economic backwaters or footnotes in the great game of finance and investing. But the great thing about capitalism is that it knows no such boundaries and there are no fixed kings: Anyone can be a Henry Ford or a Bill Gates if he or she produces something of value and works hard. The same goes for countries, and it is happening right now.

Given how light the calendar is for economic data in the U.S. this week, we thought that it would be interesting to consider what's been happening in some of these smaller countries that get less attention.

EPU Credit Suisse is forecasting that the Brazilian central government's surplus will expand more than 500 percent in August from July, thanks to a 15.3 percent increase in tax collections. While no one likes paying taxes, in this case the data is bullish because it results from real income growth.

Last week Brazilian oil giant Petrobras successfully issued $67.1 billion of new shares, the largest follow-on stock sale ever. One positive is that bankers had to offer a smaller-than-expected discount to move the deal. Another positive is that the transaction pushed capital raising in local Latin American markets to a record $49.3 billion, according to Dealogic. That's pretty impressive considering that we still have three months to go in the year and that U.S. underwriting has been lackluster.

It's also evidence that emerging countries are now developing their own local-currency capital markets. In the case of countries such as Peru or Colombia, this results from key legal reforms quietly enacted over the last 15 years but largely ignored by U.S. investors. China is also trying to develop its own corporate-bond market, and for countries such as Malaysia the new Islamic finance model is growing rapidly.

This trend has manifested itself in the little-watched Markit iBoxx Global Emerging Markets Local Currency Bond Index. The benchmark is up 11.91 percent this year, beating the 11.37 percent gain for U.S. corporate and the 8.59 percent return for Markit's high-yield index.

The trend of local-economy strength has also caused a situation not seen since the 1970s, where incomes are growing faster in emerging-markets and stagnant in the United States. There are various ways to play this trend, the easiest probably in liquid names such as Freeport-McMoRan Copper & Gold ( FCX ), a proxy for global growth, or iShares MSCI Emerging Markets Index ( EEM ).

The stocks with the most direct exposure have already rallied significantly. And, most of them are either illiquid, such as Bancolombia ( CIB ), or don't have options at all, such as Peru's Credicorp ( BAP ) or Colombian oil producer Ecopetrol ( EC ). (I have sold my position in CIB since I wrote about it on Aug. 2.)

Other names worth examining despite offering few options opportunities include the iShares MSCI Singapore Index Fund ( EWS ), iShares MSCI Malaysia Index Fund ( EWM ) and iShares MSCI All Peru Capped Index Fund ( EPU ).

The bigger takeaway is that plenty of good reasons underpin the market's recent strength. We in the United States are struggling to recover, but other countries are in the midst of a real growth cycle. It's their time to lead markets, and traders need to follow where the action is.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options



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