Chapter 1-6 Emerging Markets

There are two main schools of thought in the long term investing sphere- growth and value.  Growth investors seek to profit from companies and markets that are at the beginning of their life cycle and thus poised to grow in the near term.  Value investors seek to profit from companies and markets that they deem to be underpriced and thus poised to return to fair value in the near term.  In the world of growth investing the most popular targets are the emerging markets.  Emerging markets are rapidly growing and industrializing nations and regions that are becoming more and more influential in the global economy.  These nations and regions offer tremendous growth opportunities in a number of different industries from agriculture to technology and everything in between.

There are two main categories of emerging markets- newly industrialized countries and developing countries.  Newly industrialized countries (NICs) are economies that are not quite on the same level as first world nations, but have outpaced the rest of the developing nations in the world.  These nations enjoy rapid economic growth and constant industrialization.  Technology is prevalent, as is the presence of well developed agricultural and manufacturing economic base.  Citizens in these nations have social freedoms, civil rights, free trade, and lowered poverty rates.  NICs include South Africa, Mexico, Brazil, China, India, Malaysia, Philippines, Thailand, and Turkey.

Consider the map below which indentifies the various newly industrialized countries in red:

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Developing countries are those nations that have separated themselves from the least developed nations and failed nations, but have not quite made it into the next tier.  As such, this is an incredibly diverse spectrum including Russia, Eastern Europe, Northern Africa, and most of Central America.  These nations are often more agriculturally inclined than their NIC counterparts although this has been shifting towards manufacturing and technology at an ever-increasing pace.  Citizens in these nations enjoy a relatively free existence, moderately low poverty levels, and improving education systems although some political unrest still exists.

Consider the map below which indentifies the various developing nations in blue:

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Investing in emerging markets can be done in one of two ways- direct investing and indirect investing.  Direct investing involves converting US dollars into a foreign currency and investing directly in securities that trade on foreign exchanges.  Direct investing carries a number of foreign exchange, taxation, and accounting implications that may affect the overall profitability of an investment strategy.  This can be very complicated thus direct investing in emerging markets is rarely ever done by individual investors.  For these reasons, individual investors much more commonly expose themselves to emerging markets through indirect investments.

There are a number of ways to indirectly invest in emerging markets, the simplest of which is investing in NYSE and NASDAQ listed securities that operate partly or wholly in emerging markets.  Baidu Inc. (ticker BIDU) is a perfect example of this as it is the largest search engine in China, akin to Google.  Tata Motors (ticker TTM) is an automotive company that manufactures and sells vehicles primarily in India.  Another way to indirectly invest in emerging markets is through mutual funds.  Almost every mutual fund company has a category of funds that exposes investors to emerging markets.  Passively managed emerging market funds are often tied to a foreign stock index or group of indexes while actively managed funds have portfolio managers that try and beat the returns on the US market by buying and selling securities in emerging markets.  Due to the volatile nature of some of the economies in the emerging markets, fund investing is often the safe play as it provides investors with instant diversification.  Lastly, emerging market electronically traded funds have begun to offer shares granting investors exposure to a number of emerging markets around the world.  These ETFs may offer exposure to individual nations, specific regions, emerging market small/large caps, or even be structured to provide positive returns when the markets go sour.

The following graphic shows the 15 most heavily traded emerging market ETFs:

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Questions