Emerging countries are growing so rapidly that their stock markets are beginning to look, well ... less attractive? That’s what Blackrock’s Bob Doll, Fisher Investments’ Ken Fisher as well as Goldman Sachs are saying.
What do I think? I think it may be accurate for the near-sighted investor, if not uncommonly ironic. In the big picture, though, countries with monstrous deficits, insane debts, severe unemployment, cash-strapped citizens and record foreclosure woes will not be more attractive than industrializing nations.
The case goes something like this: Roughly nine out of 10 emerging nations need to raise interest rates to curb exhaustive GDP growth. In that restrictive credit environ, companies will find it more difficult to make money and citizens will find it more challenging to consume. Similarly, the ever-improving debt ratings of these emergers lead to stronger domestic currencies. Stronger currencies challenge countries that are more dependent on their exports.
The case continues ... as the developing world endeavors to decelerate its economy, the developed world is accelerating. The GDP gap between emerging and non-emerging shrinks. Moreover, devalued dollars and devalued euros improve the exporting prospects of the U.S. and Germany. Ergo, there’s no place like U.S. Stock ETFs and Europe’s leader, iShares MSCI Germany (NYSEARCA:EWG).
Rear-view mirror momentum certainly agrees. Here’s how a variety of ETFs stack up since December 1:
|Developed World ETFs: More Attractive Than Emerging Stock ETFs?|
|Approx % 12/1/10-1/13/11|
|iShares Russell 2000 (NYSEARCA:IWM)||8.8%|
|Vanguard Total Market (NYSEARCA:VTI)||7.7%|
|iShares Global 100 (NYSEARCA:IOO)||7.6%|
|iShares MSCI Germany (EWG)||5.3%|
|Vanguard MSCI Emerging Markets (NYSEARCA:VWO)||5.1%|
|iShares MSCI Latin America (NYSEARCA:ILF)||3.9%|
|PowerShares Golden Halter China (NASDAQ:PGJ)||3.1%|
On the flip side, there are some problems with accepting the ”superiority premise” for Developed World Stock ETFs. First, we’ve seen the temporary rotation many times before. In November of 2009, emerging market stocks began to struggle relative to developed world counterparts. Remember Dubai? In fact, it wasn’t until May of 2010 that emergers began to reassert their dominance. And they did so ... exactly as U.S. and European equities were fighting off double-dip recession talk and summertime corrective activity; developed world stocks fell mercilessly from an April peak to a July valley in 2010.
Second, where do all the great U.S. and outstanding German companies derive their “high quality” earnings from? Anybody? Yep ... they get those profits from emerging markets. So if small businesses, big businesses and consumers in emerging countries have less to spend, how long do you expect for this to translate into less robust earnings guidance from global superstars?
What’s the phrase ... sauce for the goose, sauce for the gander? Don’t over-allocate to the U.S. or Germany in a misguided quest for perfection. Maintain a stop-loss limit order discipline for all equity investments and keep an eye on moving averages. Most importantly, recognize that you’ll want to be diversified between developed and developing country markets as long as stock uptrends remain intact.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.