China and Brazil Offer Positive Emerging Market Returns

Five months after the global economic meltdown, world markets are still unstable as a seemingly continuous stream of negative economic data continues to emerge. Even after September when most world markets lost 40-60% of their value, developed markets have continued to struggle as future economic predictions remain bleak in the face of worldwide recession. According to Emerginvest, the US is down -4.87% in the last quarter, even after the September plunge.

Yet surprisingly, some of the leading emerging markets have rebounded quite well in the last quarter. After the stock market plunge in September, an exorbitant amount of investors from developed markets liquidated their “risky” assets – which included the perceived risk-heavy equities of emerging markets. The panic-selloff in emerging markets from foreign investors contributed to plunging many stocks below what would normally be acceptable valuations. Frontier markets which are exceptionally dependent on foreign investment have little to no means of propping themselves up with falling commodity prices, have subsequently continued to struggle. According to Emerginvest, countries like Pakistan, Kenya, Egypt, Nigeria, Peru, and Zambia are all down 20-40% in the last quarter alone.

However, a contingent of the leading emerging markets have significant domestic markets, and started rebounding in November when investors realized many of their equities were significantly undervalued. Since then, they have continued to post significant growth. Specifically, (according to Emerginvest) Chile and Argentina are up 5.0%, and 5.3% in the last quarter respectively, South Africa is up 7.9%, Colombia 14.2%, and Turkey 4.4%. However the two poster-children of the emerging markets from the last quarter are Brazil and China, posting 13.0% and 21.8% respective returns in just the last quarter.

Here is Emerginvest’s World Heat Map to give some context to the discussion:

While China’s stock market plummeted approximately 60% in September, it has rebounded quite well in the last three months.

Since Monday, it has jumped 1.81%, culminating in an astounding 9.9% return in the last week alone. That brings the monthly return to 18.9%, and the quarterly return to 21.75% respectively:

It is uncertain how long the phenomenal growth will continue for countries like China and Brazil. However, many economic experts agree that developed markets will produce little to no growth in the next year, and possibly even two or three years. With that assertion, it appears that leading emerging markets such as China, India, and Brazil seem like good investment decisions in the short term, even if their exorbitant growth is not prolonged.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Jonathan O’Shaughnessy, does not have any Chinese or Brazilian index ETF holdings.

Comments

[Larry House:]

The only thing I would add is Morgan Stanley is very cautious on Brazil in particular and EM companies in general stating that the worst is yet to come for them. Just today MS has a lengthy piece on Taiwan and the worsening problems there because of the degree of slow down in China. I think there is great potential in EM and great risk as well.

Feb 11 11:01 AM

[Teak:]

A long-term investor will be in all of these markets to the extent that they can handle the down-side movements psychologically. My issue with articles like these is that it comes across like advice for the day-trader.

Why not be long in Brazil, and China, and Taiwan, and India?? Eventually, all of these will move higher. And if they move sideways, then they will kick out dividends. But, of course, you have to own something that pays through the dividends.

Feb 11 05:29 PM

[Emerginvest:]

Larry,

I completely agree. There is still a tremendous amount of volatility, and such large upswings (10%+ in a week) inherently carry the high probability of equally strong downswings. For example, I wrote a piece a while back using Emerginvest's data on Sri Lanka (www.emerginvest.com/EI...), and how it was one of the best performing stock markets in the world for about a month - skyrocketing nearly 20% in 30 days. I warned in the article that it could easily overheat - which it did... cooling off and shedding some of its gains: (www.emerginvest.com/Wo...).

The point is, you are completely right. There is still a significant amount of turmoil.

Thanks for commenting!

Best,
Jonathan
Emerginvest


On Feb 11 11:01 AM Larry House wrote:

> The only thing I would add is Morgan Stanley is very cautious on
> Brazil in particular and EM companies in general stating that the
> worst is yet to come for them. Just today MS has a lengthy piece
> on Taiwan and the worsening problems there because of the degree
> of slow down in China. I think there is great potential in EM and
> great risk as well.

Feb 13 03:54 PM

[Emerginvest:]

Teak,

Thanks for posting. I completely agree that most of the value for EM is in the long-term. When you look at certain completely downtrodden market/sectors like India's banking sector down 70% - its hard to not see the value in the long term.

I'm sure you read my above reply, and do agree that there is a significant amount of volatility left. However, with my Sri Lanka example - after I wrote my article there were still a few weeks of significant growth before it cooled off. I'm not advocating "day-trading" in such relatively unknown markets at Sri Lanka, but my point is that there seems to be a trend of growth spurts of a few weeks to a month where markets tend to be exceptionally hot. In addition, I wanted to point out to most investors who are feeling that there is no where to turn, that there are plenty of good, solid EM countries which are producing significant returns right now. I think most people don't hear about, or discount places like India/China/Brazil because they seem unsafe, but yet they're producing far higher returns than the rest of the developed markets will for the next year at least.

In any regard, I agree - EM is a great place to be in a long position. Thanks for the post and I'm always interested in hearing more thoughts!

Best,
Jonathan

On Feb 11 05:29 PM Teak wrote:

> A long-term investor will be in all of these markets to the extent
> that they can handle the down-side movements psychologically. My
> issue with articles like these is that it comes across like advice
> for the day-trader.
>
> Why not be long in Brazil, and China, and Taiwan, and India?? Eventually,
> all of these will move higher. And if they move sideways, then they
> will kick out dividends. But, of course, you have to own something
> that pays through the dividends.

Feb 13 04:00 PM