Forget the old adage "When the U.S. sneezes, the world catches
Friday's solid employment report shows the U.S.economy -- the
world's largest by a considerablemargin -- to be faring
The new adage: "When China sneezes, the world catches a
China's economy, which recently overtook Japan's as the
world's second largest, has been slowing throughout the first
half of 2013. That slowdown is wreaking havoc on many emerging
The sharp pullback in places like Brazil, Australia, Turkey
and elsewhere should be seen as opening for investors that have
been awaiting better valuations in these markets. Indeed,
theforward earnings multiple for many of these countries'stock
markets has been drifting ever lower, creating a valuation gap
with U.S. stock markets that, in some instances, approaches
Still, investors need to know that these markets can surely
fall lower, so it's crucial to take the long view withinvestments
in Latin America, Asia, Eastern Europe and Africa. If the Chinese
economy weakens further, its huge role in global trade means that
some emerging-market economies might actually slip into
arecession in comingquarters .
It may be too soon to draw such a dire conclusion, and some
these markets may have already hit bottom. However,
theInternational Monetary Fund (
) this week pared back its growth forecast for thisyear to 3.1%,
down from the 3.3% it projected in April. This underscores the
need to monitor the global economy closely if you plan to wade
into these markets.
A Lone BrightSpot ?
Yet throughout the downturn inemerging markets , one country
appears poised to feel only a minor impact from a slowing China.
It's home to 250 million people (the fourth-largest population in
the world), has been posting robust growth rates thanks to a
rapidly expanding middle class, and now has sufficient domestic
consumption to insulate itself from the global trading headwinds
that are emerging.
That country: Indonesia, which has been moving up in global
rankings and now has the 17th-largest economy in the world, just
ahead of Turkey and right behind South Korea, according to theIMF
This economy is growing at such a robust pace that one can
cite a variety of impressive statistics. For example, autosales
rose 17.8% in the first quarter of this year from the same period
last year. Here's another: Foreign directinvestment surged 27% in
the first quarter to around $7 billion. That's the fastest growth
rate of any of the world's 50 largest economies. Notably, much of
that recent foreign direct investment is targeted at the
Indonesian consumer -- not at the traditional mining industries
that were once the backbone of the economy.
Indonesia's economy has grown in excess of 6% for each of the
past three years, according to the IMF. Can that growth rate
last? Probably not. The troubles in Chinawill likely shave a
percentage point or two off of Indonesia's growth rate. The IMF's
latest forecast suggests 6.3%GDP growth this year and 6.4% growth
in 2014. Look for that forecast to move closer to 5% as the year
Indonesia's biggest headwind isn't China -- it's corruption
andred tape. The country is "growing by 6% but should be growing
by 10%," a U.S. Chamber ofCommerce official recently told The New
The good news: The Indonesian government is aggressively
revamping the process for new business applications, and
anti-corruption efforts, which were launched five years ago, are
starting to finally take root in the form of heavy fines and jail
time for bribery. (As the Huffington Post
, however, more work still needs to be done.)
Time To Invest?
Indonesianstocks have surged more than 300% since the end of the
2008 economic crisis, and investors waiting for an entry point
have been frustrated as the Indonesiamarket moved ever higher. In
recent weeks, that opening may have arrived.
There are three exchange-tradedfunds (
) that focus on Indonesia, all of which have been sucked into the
emerging-markets downdraft of the past few weeks:
iShares MSCI Indonesia InvestableMarket Index (
. Thisfund has $475 million in assets and a 0.61%expense ratio
Market Vectors IndonesiaIndex ETF (
, which has $325 million in assets and a 0.59% expense
Market Vectors Indonesia Small CapETF (
, which has just $7 million in assets and a 0.61% expense
Risks to Consider:
Emerging markets remain quite volatile, and though they
appear to have found a floor in recent sessions, they could
easily stumble further before an eventual rebound.
Action to Take -->
Investors who were wise enough to invest in Japan in the 1960s,
South Korea in the 1980s or China in the past decade scored
hugegains for one basic reason. Those economiesput the foundation
in place to build a thriving middle class, which established a
self-sustaining pattern of rising domestic consumption. Indonesia
appears to be working off of the same playbook. It's unclear
where Indonesian stocks will trade three or six months from now,
but long-term investors could reap significant gains.
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