OCEAN CITY – The steep market declines of the past year have been undeniably global, with stocks just about everywhere suffering major losses. Yet the recovery is likely to unfold unevenly, with early opportunities for economic growth in such emerging market countries as Brazil, China and Russia. The MSCI Emerging Markets Index, which is a benchmark for market growth in developing countries, has climbed over 70% since March, and shares in many developing nations seem poised continue increasing.
“Emerging markets are coming back, and they should remain attractive places for investors in the years ahead,” says Michael Hartnett, Chief Global Equity Strategist at Banc of America Securities–Merrill Lynch Research.
Some governments in Asia and Latin America are doing their part to spur growth in their countries by increasing outlays for infrastructure and encouraging domestic spending. Their central banks are keeping interest rates low, making it easier to borrow and stimulating demand for consumer goods. And while banks in the United States and Europe found themselves holding massive amounts of mortgage-related debt when the recession struck, that wasn’t the case for many emerging markets.
Mortgages are relatively rare in such places as Brazil and Russia, where the value of home loans is equal to just 2% and 3% of the gross domestic product, respectively. That contrasts sharply with the situation in the United States and Great Britain, where mortgage debt exceeds 70% of GDP. By June 2009, more than $1 trillion in loans had been written off in the U.S. and Europe, while banks in Asia had written off just $43 billion in similar loans. “There are fewer toxic assets in Asia and the emerging markets,” says Hartnett. “So the banks there will not constrain growth.”
Among Hartnett’s favorite emerging market opportunities are Brazil, Russia and China — three of the BRIC nations (India is the fourth) —and he says the outlook for China seems especially bright. “The country has made a dramatic policy response, and it is working,” Hartnett says. A $600 billion government stimulus package is projected to help China’s economy grow by as much as 9% this year, and the population of 1.3 billion represents vast consumer demand that is only beginning to be tapped.
As you discuss global financial opportunities with your financial advisor, consider these questions:
Does my portfolio already have exposure to these markets?
What might be the cost of waiting for this trend to develop more fully before I participate? The benefit?
How could I maintain a diversified portfolio if I invest in emerging markets, given their high correlation with developed-market activity?
In Russia, Brazil, China and other emerging markets, stocks have been selling at modest prices, even after their recent rally, with a forward price-to-earnings ratio of 13.2 (roughly in line with the historical average of 13.6). Many financial companies remain in sound shape, with shares selling at a discount compared with counterparts in the developed world. And fixed income investments in emerging markets are now less prone to default than they were a decade ago, as evidenced by today’s lower yields.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)