Boosting Returns Through Measured Emerging Market Exposure

Roger Nusbaum submits: There is a cautionary article in the WSJ about emerging markets that warns of a possible crisis in Hungary, Kazakhstan, Russia, Ukraine, and Estonia because of how they have borrowed money.

While it seems there are more people that call for a crisis than actual crises that occur, this point could certainly pan out exactly as opined -- but I don't know.

It is much easier to know that certain countries face the same risk. For example Iceland, New Zealand and to a lesser extent Australia are all vulnerable to yen strength. It is easy to see whether a particular country is a deficit country or a surplus nation, and chances are you want exposure to both, that is if you break it down to the country level.

Of the Eastern European markets mentioned above, Russia is the easiest to access. Russia has a lot going for it: surpluses, strong currency, natural resources and so on. There is some sort of political risk (the amount and reality depends on whom you ask) and if the price of oil cut in half Russia would be hurt. Clearly anyone wanting to add Russia does so expecting to add outperformance versus their domestic benchmark. No one adds Russia as a defensive measure.

It almost makes the argument that with any Russian stock or fund you buy you should really go for a lot volatility. If the selection of Russia is correct a more volatile Russian stock, or whatever, will really do a lot of lifting within the portfolio. The place for moderation is in the weighting -- not the stock selection (bottoms up research still needs to be done of course). Putting 2% into a stock that could go berserk in either direction is not the most reckless thing you could do, far from it.

Investors get in trouble when they get so enamored with a stock like this that they put 10% in it. Putting more than 2-3% into something you think is very volatile, regardless of whether it really is or not, will bite you at some point.

Comments

[Everyday Fi...:]

A nice way to temper some of this risk is through high-yielding international ETFs, ADRs and international REITs. Even with some volatility in the underlying equity price, by picking some vehicles with steady payouts, it's like owning a real high yield bond; some of these exceed 10% annually. I'd recommend at least 5% of any portfolio for most people under 40; for those around 30, perhaps 10-15% in international. For picks and pans, feel free to visit and contribute at:
everydayfinance.blogsp...

2007 May 30 02:47 PM