Emerging market ETFs have been hit hard this year. In fact, emerging market stock funds reported outflows for the seventh consecutive week, with $1.3B leaving in seven days ending Sept. 14. The MSCI Emerging Markets Index (EEM) is off 25.6% YTD. Simple economics tells us that when money is flowing out, interest is waning and the prices will drop for lack of interest.
With the fiasco we continue to hear about in Europe, where one day the news is good and the next day the news is bad, the EEM ETF is one to put on a watch list.
Myra Saefong of Market Watch points out that emerging markets will continue to grow three times as fast as the G-10 because they carry one-third the debt levels of G-10 economies. They will continue to have “solid domestic demand, strong reserve cushions, and domestic financing sources." The International Monetary Fund (IMF) is projecting a 6.1% growth rate for the emerging markets in 2012, as compared to only 1.9% in the developed world.
Does this mean that we are ready to see funds like the EEM grow in 2012? Not necessarily. Emerging markets are projected to continue to grow at a 6% clip, but this may not help the world economy at all. Neal Shearing, senior emerging markets economist at Capital Economics, points out that they also will keep running a large current account surplus. This being the case, these markets really need to import more to help the global economy. But, with the growing tensions and an ever-so-close financial collapse in Europe, even the export surplus could dry up, wounding the world economy even more.
There is still too much turmoil in the world to predict money flowing back into EEM. If one is looking for conventional growth, then come back home and look at some of the stalwart companies that are growing because they are selling in these markets. Your interest in emerging markets should turn to companies back home like Philip Morris International (PM). The company surprised analysts with better than expected third quarter results. PM revenue from Asia was up an impressive 53%, and CFO Hermann Waldemer said in the earnings conference call that the Asian market is the "growth engine" of the company.
GE (GE) is another good example. It reported good numbers for the latest quarter, helped by good revenues seen in foreign markets such as China (FXI), Brazil (EWZ) and Russia. Industrial equipment (XLI) orders grew 16% and international sales by 25%. Its strategy to drive growth in emerging markets to counter weak markets in the U.S. and Europe is obviously paying off.
These are just two examples of how a conventional investor should be looking at the markets if they wish to take advantage of growing companies. On the other hand, for those who wish to look for opportunities through options can consider the following. Using the Bollinger Bands, one can look at weekly charts and see that EEM is using the middle band (20 day MA) as a resistance point.
Weekly options will give one a great advantage here if you know how to utilize time decay to your advantage. Waiting until Wednesday afternoon or Thursday morning, a Bull Put Spread close to resistance can net a nice weekly profit if one is initiated correctly. If EEM continued down, 41.87 is where the resistance level is on the middle Bollinger Band. Selling the 42 November 4th weekly call at $.10 and buying the same date 43 call at $.04 would net the savvy investor a $.06 (6%) profit for the week. It is early so this trade should be looked at on Wednesday or Thursday. But, with the weekly options a small gain can add up to quite a bit each week. (4.33 weeks in a month x 6%)= 26% monthly gain.