BRIC Stock Markets at Lowest Level in Seven Years
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Probably one of the biggest mistakes made by individual investors in their portfolio is a lack of exposure to international markets. In particular, many investors lack sufficient exposure to the fastest-growing economies on the planet...the emerging markets.
The good news right now for those looking to establish or add to their positions in these markets is the fact that the stock markets in the largest developing markets – the BRICs – are priced as if an economic meltdown were about to occur in these nations. For those unfamiliar with the term BRIC, it refers to the countries of Brazil, Russia, India and China.
These biggest emerging markets are contributing more than ever before to the global economy. According to the International Monetary Fund, the BRICs will comprise 20 percent of the world economy this year. This year combined GDP in the BRICs will climb to more than $14 trillion from just $2.8 trillion in 2002. This comes after more than a fourfold growth in the past decade.
Yet, according to Bloomberg, their combined stock market valuation has fallen to only 16 percent of the global total in equities. The valuation of BRIC stocks has fallen to $7.6 trillion in 2012 from $9.5 trillion a year ago or 18 percent of global market valuation. In what surely must be a wake-up call for bargain hunters, this is the widest valuation gap in seven years!
The last time the valuation gap was this wide – in 2005 – it closed rather quickly. That year, the MSCI BRIC Index skyrocketed 53 percent in twelve months! That was double the gain shown by the MSCI All-Country World Index. Investors can easily track and even own the MSCI BRIC Index through the use of an exchange traded fund (ETF), the iShares MSCI BRIC Index Fund (NYSEMKT:BKF).
In an interesting note, the world's largest institutional investor – Japan's Government Pension Investment Fund – has made a recent move into emerging market equities as it seeks higher returns amid very low bond yields around the globe. The majority of its assets are locked into ultra-low yielding Japanese government bonds. However, it is starting cautiously by investing only 100 billion yen to start.
Many of the world's other institutional investors are also slow in moving toward investments in emerging markets. So this is one instance where the individual investor can get there first and enjoy the run-up in prices as the institutions begin to pile in. There are numerous other unleveraged ETFs that individual investors can use in order to get exposure to developing markets including sector ETFs or ETFs that are focused solely on one country or region of the globe.
Perhaps one of the better ways to play the emerging markets is to focus on the growth of a consuming middle class in these countries. A recent poll from the Pew Research Center showed that people in emerging economies are much more optimistic about their economic futures than their counterparts in other countries. Interestingly, the most upbeat people in the survey were the Chinese, despite deep doubts elsewhere about their economy.
If people are optimistic about the future, they have a tendency to spend and consume. So consumer-focused emerging market ETFs might be worth a look for investors.....
The following ETFs focus on consumer-related sectors such as retail, food, personal goods, travel and leisure, and autos in individual countries: the Global X China Consumer ETF (NYSEMKT: CHIQ), the Global X Brazil Consumer ETF (NYSEMKT: BRAQ) and the EGShares India Consumer ETF (NYSEMKT: INCO). These ETFs have about 30 consumer-related stocks in their portfolios with about half of the monies invested devoted to the top 10 positions.
Another broad-based ETF in the consumer sector for emerging markets is the EGShares Dow Jones Emerging Markets Consumer Titans ETF (NYSEMKT: ECON). This ETF's portfolio consists of the 30 biggest consumer goods and consumer services companies in developing markets and is diversified across a broad swath of emerging markets.
For those investors still hesitant about investing into emerging markets because of all the negative news about them coming from Wall Street, think about it this way: It's not news that growth in the emerging markets has recently slowed. But that and more has already been factored into current stock market valuations. It's like saying Apple is a successful company...old news.
The years ahead still look bright for emerging markets and much more so than for debt-laden developed economies. So now with valuations so cheap, it may be time for bargain hunters to dip a proverbial toe into emerging market waters.
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