Accessing Emerging Markets Via Multinational Companies (PTR, AIG)

Includes: AIG, PTR
by: Roger Nusbaum

Roger Nusbaum submits: A reader sent me a comment on a point that comes up a lot:

For the people who want to invest in emerging markets, it seems to be that the best way to get into those markets safely is buy investing in large multinationals/foreign companies that do buisness in those regions.

To me that seems like ETF's like PID and KIE are a good way to get involved in these markets. As a set of global natural resources plays, the iShare's Canada/Australia, and the ETF IGE, could be a good play on the natural resources that China/India will need in the future.

It seems to me that almost every interview on CNBC about international markets this question comes up. What about buying US companies that do business in emerging markets? The answer on TV always varies.

This discussion is emerging markets, right? A big American industrial or insurance company is not an emerging market company. Part of your fundamental process may be to include a company because it derives revenue from emerging countries.

This chart compares Petrochina (NYSE:PTR), AIG and the S+P 500 from April 2000 through year end 2002. The action on the chart perfectly captures my point. AIG does a lot of business in emerging markets. Perhaps it was the emerging exposure that allowed AIG to do better than the S+P, but it still tracked closer to the S+P than PTR did.

I should note that I looked at Caterpillar in this same vane and CAT, which some of my clients own, had a period of time where it correlated to PTR but then CAT fell away from it very sharply toward the end of the time period.

There are several moving parts here: One is moving away from US dollars in your portfolio, another is riding coat tails of another market even if you pick the wrong stock within that market, and yet another is the relatively low correlation that emerging markets have to the US market. To be fair and balanced, I should note that some studies show the correlation is closer than it used to be.

From there the issue then becomes how to access emerging markets. The choices are common stock or a fund of some sort. Obviously what you do from there depends on you tolerances and preferences.

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