The Economist has created the "wiggle room index," an interesting way to look at fiscal and monetary flexibility in emerging markets given an escalation in European problems.
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The Wiggle-Room Index uses five monetary indicators -- inflation, excess credit, real interest rates, currency movements and current-account balances -- to measure the monetary risk to the local market from further credit problems in the developed world. These factors were then combined with the level of government debt and budget deficit to compose the index.
China, Indonesia and Saudi Arabia came out on top with five other countries firmly in the green. Egypt, India and Poland were shown as the least well-prepared along with six other countries in the red.
While the measure is probably a good start to assessing the local risk to global problems, it overlooks some key measures and should only be used with other analysis. Many of the countries defined as high-risk -- Brazil, for instance -- are have fewer economic ties to the euro zone and more ties to China and other emerging markets. Continued resource demands out of China and the United States will drive a strong export market for many of the resource countries.
As the euro zone crisis dominates the headlines, there is a risk of believing that problems there will continue to drive markets. While the so-called risk trade may control daily and weekly fluctuations, there are many other factors of which investors must be aware.
High oil prices and commodity demands from China will drive markets in countries like the Middle East and Latin America. India is facing its own internal problems as bureaucratic inefficiency threatens otherwise strong growth fundamentals.
Instead of trying to predict the daily soap opera out of Europe, I have chosen to remove it from my portfolio by shorting the region via the Rydex CurrencyShares Euro Fund ( FXE , quote ), with the SPDR S&P International Finance ( IPF , quote ) as hedge protection against my U.S. banking portfolio. While this will not entirely remove euro-related volatility from my portfolio, it helps me focus on other fundamentals within my investments.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.