Is the China trade over? A two-decade long run has catapulted
to amazing heights, but real cracks are starting to appear:
has perked up, the housing sector looks overextended and rumors
persist that some major banks will need a bailout.
The path ahead is no easier. Chinese planners are pulling off the
delicate act of slowly letting their
strengthen in a bid to shift from an export-led economy to one led
by consumer spending. China will continue to emerge even stronger
in the decades to come, but the near-term may just be getting too
bumpy for many investors. This is a
I only want to own after a major sell-off.
But a wide range of other emerging economies should be getting your
attention right now. They've posted impressive growth that has
fueled a spike in consumer spending, have sound government
policies, and if they play their cards right, then they have a real
shot of eventually becoming economic powerhouses.
Not the usual suspects
While most investors have largely focused on BRIC countries
(Brazil, Russia, India, China), some investors feel this theme has
been played out and are instead moving into the CIVETS (Colombia,
Indonesia, Vietnam, Turkey and South Africa).
I profiled the group last summer
, noting that Turkey held the greatest appeal (I also still favored
Brazil among the BRICs). I still think the CIVETS hold tremendous
In China's backyard, Indonesia and Vietnam are making major
progress, but are likely to hit speed bumps from nepotism and
communism, respectively, as their economies open up. Indeed,
Indonesia went on to become one of the hottest stock markets in the
as I noted here
, though it has dropped more than 20% since then in tandem with the
global market selloff.
In fact, many
have taken it on the chin this summer, simply because they have
historically been seen to be especially risky in times of global
economic crisis. Notably, the
International Monetary Fund (
anticipates many of these same countries will post robust economic
growth in 2012.
Don't let the numbers fool you
Let's run through the numbers. First, how have these markets fared
since the U.S. markets began plunging in late July?
Well, the S&P 500 is actually holding up better than most
global indexes. But don't let that fool you. Look at this table as
a price sheet, telling you how discounted these markets have become
in the past few months. Combine that with a long-term view, and
things start to look very compelling...
A few markets have plunged more than 25% since July, for
country-specific reasons. Russia's sharp plunge is attributable to
a pullback in oil prices and a setback for business-friendly
President Dmitri Medvedev, who has apparently lost a power struggle
to modernize the country against once and future President Vladimir
Putin. Chile is feeling the pain of plunging copper prices, which
are the No. 1 source of foreign
. And investors are fleeing South Korean stocks on fears that
China, its biggest trading partner, will need fewer imports.
The selloff in many of these other markets doesn't jive with
growth forecasts. Real
gross domestic product (
is expected to grow by a fairly robust 6.4% in emerging and
developing economies in 2012, but by only 1.6% in advanced
economies 2012. This should equate to global economic growth of
about 4%. Economic weakness in Europe and the United States won't
leave emerging markets unscathed -- Chile's pain from falling
copper prices is just one example. Yet increasingly, these emerging
economies are turning to each other to fill the void created by
slumps in Europe and the United States. Southeast Asia, though
still somewhat dependent on China, is seeing double-digit trading
gains among smaller neighbors. Brazil, though somewhat dependent on
the United States, is seeing robust demand from places like
Colombia and Mexico.
With that in mind, here are two groups of emerging economies that
hold great long-term appeal for investors. The first group is home
to large economies that are poised to keep growing, but are now so
large that their days of explosive growth are over. These are the
lower-risk, lower-reward markets. Group two comprises the economies
on the cusp of even stronger growth, albeit with plenty of ups and
downs along the way. They carry ample risk, but could deliver major
Group 1: Turkey, Brazil, India
These countries have seen all kinds of ups and downs through the
decades, but they now appear to be on a very stable path. I've
extolled Brazil and Turkey's virtues in earlier articles. What
about India? Well, the IMF anticipates 8%
growth in both 2011 and 2012. Real hurdles remain -- especially in
terms of infrastructure, but the emerging class of young
professionals appears far more committed to transparence and
world-class business practices than the generation they are
succeeding. With such a huge population and the potential for a
rising middle class, you simply can't ignore India, especially as
its stock market has just been tagged with a "20% off" sale.
Group 2: Indonesia, Colombia, Vietnam, Thailand
These four countries are collectively home to nearly 400 million
people. And in each instance, they've made great strides by
reducing the impact of corruption (Indonesia), terrorism
(Colombia), statism (Vietnam -- though more work remains) and
infrastructure (Thailand). Executives at
were recently in Asia, noting their excitement about the large
Chinese market, but also noting that sales of Ford's cars and
trucks are really taking off in places like Thailand and Indonesia.
Risks to Consider:
in the United States and Europe would surely hurt because it would
depress demand for exports. Commodity-focused countries in
particular such as Chile, Russia and Brazil hold the greatest risk,
while a big slowdown in China would surely hurt its key trading
partners such as South Korea and Taiwan. On the other hand,
sustained or even accelerating growth could also prove troublesome
for countries like Vietnam that still lack the infrastructure and
government policies to handle any bottlenecks.
Action to Take -->
Trying to handicap these countries on some sort of fundamental
basis is a very tough task. Simply looking for the global stock
markets with the lowest price-to-earnings (P/E) ratios won't help
because too many factors go into determining performance. Near-term
earnings forecasts are irrelevant anyway, because these are
long-term opportunities. Indeed, you should be focusing on the
countries that appear best-poised to generate sustained long-term
growth on the backs of expanding middle classes. I think the
countries I mention here make the cut.
-- David Sterman
Forget China. These are the next emerging powerhouses set to
deliver big gains to investors.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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