is seven times larger than Brazil's economy. Yet the U.S. stock
is 12 times larger. That's simply the result of the fact that most
global investors want exposure to the United States, relatively
under-weighting Brazil and other markets in the process.
Now consider this: the Brazilian economy, due to its relatively
undeveloped nature compared with the United States, is poised to
grow by a faster pace than the U.S. economy in the next 20 years.
By some estimates, the U.S. economy will only be three times as
large as the Brazilian economy by 2040. In that light, does it
still make sense that the U.S. stock market should be 12 times as
This isn't really an article about Brazil. It's about the many
that are currently quite small in relation to the United States,
but possess vastly superior growth prospects. Here's a look at
various countries and the value of their stock market in relation
to the total world stock market. (Data supplied by Bespoke
Investment Group and CIA World Factbook.)
With the exception of China/Hong Kong, every country on this table
represents large, established economies that have likely passed
their peak growth rates.
Now consider these numbers...
The fact that places like the United Kingdom, Canada and France
have larger stock markets than Brazil, India and Russia -- even
though those countries' economies are noticeably larger -- is
. These Western nations are getting credit for where they've been
during the past century (and the relative maturity and stability of
But stocks markets should really be a reflection of where economies
are headed. And by that score, it's no contest. These second-tier
nations are growing two to three times as fast as the Western
economies, and that appears to be a long-term trend.
Let me pose a question. Would you rather own "the U.S. market," or
all of the countries on that second table? Well, all of those
countries are still worth just one-third of the U.S. market, even
when added together.
Safer than ever
It's clearly unwise to measure a country's appeal simply by
comparing economy and stock market sizes. The real measure is the
perceived safety that these markets represent for investors. The
fact that United States and Europe, which have one-eighth of the
world's population but more than 60% of the world's stock
, is simply because the emerging markets have proven to be too
untrustworthy for most investors.
Yet with each passing year, that paradigm is changing. Countries
like Brazil, China, Indonesia, and Turkey are now characterized by
much better government, a much more advanced infrastructure, much
reserves and sustainable domestic consumption. These markets will
still slump on occasion, but if you use a five or 10-year time
horizon, these economies are actually on more stable footing than
the Western economies.
In the past year, I've focused on countries like...
-- Brazil [
Read my original take here
-- Mexico [
-- India [
-- The CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and
South Africa) nations [
These markets are all performing well in the early part of 2012,
not because their economies are growing at an accelerating rate,
but because investors have come to see that the crisis in Europe
won't turn into some sort of global contagion.
Risks to Consider:
Emerging markets will always be more volatile than more
established markets, prone to 30% to 40% annual price swings. Yet
over the long haul, these markets represent much more upside than
the slower-growing Western economies.
Action to Take -->
The emerging market that holds the greatest appeal to you is a
function of risk tolerance. Countries like Brazil, Chile and Turkey
hold only moderate risk, simply because they already have thriving
middle classes and business-friendly investment climates.
Countries like Vietnam, India, Ghana and Indonesia could still
stumble on their way to stronger economies, but they are slowly
building up a solid foundation. At a minimum, you can take a
diversified approach. The
MSCI Emerging MarketsIndex (NYSE:
owns a range of blue chips, from South Korea's Samsung to Brazil's
to Russia's Gazprom to Mexico's
America Movil (NYSE:
PowerShares Emerging Market Debt Fund (NYSE:
owns the strongest, high-yielding
issued by many of these countries. I prefer the
SPDR S&P Emerging Markets Small CapIndex Fund (NYSE:
because its portfolio is most closely tied to the dynamic growth of
these emerging economies. The point is, choices are no longer an
excuse. You simply owe it to yourself to figure which method of
exposure to these dynamic regions is best for you.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.