Investors can easily become stuck in a rut. A rut means doing the same thing over and over again despite the results. Stock investors, for example, often just trade the sector or niche that they always have. It doesn’t matter if there is another market sector that has set up to create outsized profits or not, they just keep on doing the same thing over and over again.
No place is this “investing rut” more evident than stock investors who refuse to look outsized of their home country for profitable stock investments. There is a tremendous number of investors stuck in the domestic stock only rut. This rut is very thick due to the relative newness of being able to access markets outside of one’s home nation. However, today, with the advent of the internet and ETF’s trading a foreign countries stock is as easy as trading anything domestically.
Traders who have broken out of the “domestic stocks only” rut have seen tremendous returns in 2016. One can witness this rut, particularly in the emerging market economies. For example, Peru has seen its country stock index soar 37.4%; Brazil saw a 32.5% advance, and Russia boasts a 23.3% increase this year alone. At the same time, the S&P 500 has gained just over 2.3% for the year!
Imagine your returns had you invested in one of these emerging markets. In fact, 20 of the 26 emerging markets tracked by Reuters have outperformed the U.S. markets thus far in 2016.
Many investors are afraid of emerging markets, believing they are too risky therefore remain stuck in an investment rut. Make no mistake; there is high risk in emerging markets. Political and economic risk runs deep in the emerging markets. However, the risk is the reason huge profits are possible. This article will answer the what, why and how you can benefit from emerging markets in 2016
First, let’s define the terms.
What is an emerging market?
An emerging market economy is a country’s economy that is moving toward becoming advanced. I know this may seem somewhat nebulous, but economists define it as local debt being liquid, the existence of an equity market, a market exchange, and a regulatory mechanism.
Emerging markets often do not provide the amount of market efficiency, accounting standards and security controls to equal advanced economies (such as the United States, Europe, and Japan), but emerging markets will have a single currency, financial infrastructure, banks and a stock exchange.
Emerging markets have suffered over the last several years, but recent changes have turned the ship around in several.
China is the world’s largest emerging market and is suffering from the slowest growth in a quarter of a century. The Chinese stock market return has been a dismal negative 2.8% so far this year, but there are definite signs of improvement.
Most importantly is that, as everyone braced for the continued slowdown, the Chinese economy signaled apparent stabilization in February. The stabilization with growth hitting a bottom in the 6-7% annual range triggered risk on for the big money players. Some experts are expecting this 6-7% growth to continue through 2020.
In turn, the growth has resulted in the ChinaAMC A-Share Market Vector ETF (NYSE:PEK) climbing from a bottom of $32.00 per share in mid-February to a recent high of just below $40.00 per share.
China is important to follow since it can act as a barometer for other emerging markets, as well as the global economy as a whole.
At the same time, Brazil’s markets have soared in 2016 with a gain of over 32%. Make no mistake; political risk takes the forefront in Brazil. Corruption has run rampant in this South American nation. However, a clampdown on Rousseff’s parliamentary regime triggered aggressive buying in the stock market.
Russia has been a similar success story, but this story is built on oil and sanctions. Russia has seen its stock market rocket higher by 23.3% over the last four months. Low oil prices and Western sanctions damaged the Russian economy, but the Kremlin has stepped in to help supports markets. One example is the government has agreed to a $2.2 billion bailout of state bank Vneshekonombank (VEB).
Also, oil has advanced from an intraday low of $27.00 per barrel to close to $44.00 per barrel helping to stabilize the Russian economy.
Despite the economic sanctions, the Kremlin continues to show tremendous skill in managing the financial situation. PMI climbed to 50.9, and industrial production grew by 1.0% in February. The tell-tale unemployment numbers posted at 5.8% besting the Eurozone’s average of -10.3% paint a picture of an economy quickly on the mend. A debt burden of 13.5% of GDP is among the lowest on earth further supporting the growth figure in Russia.
Finally, with the U.S. Presidential Elections in November, the economic sanctions have a chance of being lifted. Should this occur, expect a bullish explosion in the Russian markets.
India’s stock markets have not performed as well as the others above with a -1.7 growth in 2016. However, we economically sound reasons to expect a rebound soon in this vast emerging economy. I recently read that Noble Prize-winning economist Michael Spence believes that India’s economy is a decade behind China and tracking the same trajectory. There is no question that this signals incredible potential bullish expansion!
Add in the fact that India is about to sign its first ever free trade agreement with Australia in the next several months.
We love the fact that India provides the demand side of the equation while Australia boasts the commodity and energy side. It is a match made in economic heaven!
The Indian middle class has started a bullish economic shift with consumers moving toward the middle class. This will increase consumption and move the nation rapidly toward an advanced economic status over the next decade.
Now is the time to jump on board the emerging market profit train. Many investors are at a loss as to how to do this. Believe me; it is nowhere as difficult as you may think! In fact, it is as easy as buying a single stock on a U.S. based stock exhange. Just like you do with domestic stocks.
Economists have neatly packaged the above economies into a single acronym. The acronym is BRIC, representing the first letters of Brazil, Russia, India, and China. The Bric’s represent both the fastest growing emerging market economies and the ones most likely to become the fastest growing over the next decade.
The combination of current performance with the potential for long-term growth from the laggards in the group makes the BRIC nation group a no-brainer when it comes to investing.
The best way to access the entire BRIC nation group is via Exchange Traded Funds or ETF’s. One of the leading ETF’s in this space is the
One of the leading ETF’s in this space is the iShares MSCI BRIC Index Fund (NYSE: BKF). The iShares MSCI BRIC ETF seeks to track the investment results of an index built on Chinese equities that are available to international investors, and Brazilian, Russian, and Indian equities.
BKF has soared from around $24.00 per share to above both the 50 and 200-day simple moving averages to a high just above $31.00 per share. Price has since slipped off the top creating an ideal pull back buy opportunity in the $30.20 per share zone.
The time is right to break out of your investing rut and give the emerging markets a close look for possible investment!