One recurring theme here over the years has been the increasing importance of emerging market investing and the extent to which access has evolved, mostly with ETFs. This weekend's interview in Barron's was more like a roundtable on emerging market investing -- it is not that easy to find as they put in with the mutual fund quarterly report.
There were a couple of very useful comments along with the stock pick commentary.
From Rajiv Jain: Two-thirds of emerging-markets companies are leveraged to global growth. When the average investor makes a call on an emerging-markets index, you aren't really buying emerging markets. You are making a call on global growth. The problem is that global growth is floundering...So are we buying emerging markets or not?
To put this comment in the jargon of this blog I might say that some emerging market stocks capture a country's rise in the world economic order while others capture the story on the ground. In a diversified portfolio exposure to both types of stocks has merit. An example of a world economic order stock could be Vale (NYSE:VALE), which is a long time client holding. The big driver for Brazil is resource exports. VALE is at the core of that and is owned in just about every Brazil index fund there is.
Two-thirds of emerging-markets companies are leveraged to global growth. When the average investor makes a call on an emerging-markets index, you aren't really buying emerging markets. You are making a call on global growth. The problem is that global growth is floundering...So are we buying emerging markets or not?
One example of a stock that captures the story on the ground could be Zhejiang Expressway (OTCPK:ZHEXY), which is a Chinese toll road stock. Another would be Cementos Argos (CMTOY), a Colombian cement company. There are also quite a few specialized ETFs that come closer to capturing the story on the ground than the broadest index funds like the iShares MSCI Emerging Market Index Fund (NYSEARCA:EEM) or the Vanguard equivalent.
There was also a comment in the article about correlations between emerging markets and US stocks having gone up in recent years. There are at least a couple of reasons for this including the $36 billion that as gone into EEM; the easier the access and the hotter the excitement about returns the more money that flows into the broad indexes, which causes the correlation to go up. Obviously if the correlation goes up then the diversification offered diminishes. Not that there is no benefit just less benefit.
This makes the case for more specialized exposure, a repeat theme here, than buying a bunch of EEM. This does not have to mean going exclusively small cap, VALE is not exactly an under followed stock. Eyeballing a five year chart from BigCharts, VALE has had a more volatile ride to a 200% gain versus about 65% for EEM.
If individual stocks will never be your thing there are of course plenty of ETFs that fit the bill with more on the way. And, repeat concept, if stocks are your thing then looking under the hood of ETFs is a useful place to begin a search. For example, a look at the cap weighted SPDR S&P China ETF (NYSEARCA:GXC) down to the middle of the holdings as listed on the SPDR website and you'll find Tsingtao Brewery (OTCPK:TSGTY). Tsingtao is profitable, has a HKD50 billion market cap, is listed in Hong Kong and Shanghai in addition to the ADRs, pays a very small dividend and is a beer you have had before.
I have no idea whether anyone should buy Tsingtao or not but there is not much reasonable risk that this thing is a fraud that will go to zero one weekend.