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July, 2011

TEN TO CAPITALIZE ON EMERGING MARKET DYNAMICS
by LARRY

In recent years, it is becoming increasingly obvious that the emerging market growth potential is far greater than that of the developed world. This naturally has implications for global stock market returns. Taken as a whole, the world's industrialized regions may look forward to around 2-3% average annual growth, compared with at least twice that for the emerging market regions. Naturally, market performance will tend, over time, to be greater for the latter than the former. Those seeking relative investment stability may still prefer to invest solely in the well established economies. One can expect more volatility in individual emerging market country stock returns. However, the effects of even severe ups and downs look much less daunting when averaged among several different markets, particularly over the long-term. Since the largest proportion of growth is almost certainly going to come from emerging market dynamics in the years ahead, it may be we would be giving up too much if we close ourselves off from these markets simply because in any given year there may be steep declines within a few countries.


It seems better to me, then, to invest a significant portion of our cash in stocks or funds that can benefit from the emerging markets' superior dynamics. Whereas earlier I might have wanted a 10-20% exposure to global equities, now I prefer 30-40% and would not mind if that rises even to half of our net asset value, with the majority of such holdings devoted to emerging markets.

I define emerging markets a little differently than might be generally assumed, however. If a country has a large supply of commodities needed for the inevitable growth of emerging markets, then its growth seems assured and warrants inclusion in a portfolio of nations likely to reap big returns from emerging market dynamics. Australia has been included based on this criterion.

And if a substantial proportion of a nation's population is as yet not as well off as is more typical in middle-class cultures or economies, but individuals in that segment have on average the means to get ahead, their potential upward mobility lends emerging market dynamics to even a large and established economy. Thanks to both immigration and higher birth rates, such is now the case, in my opinion, with the rapidly growing Hispanic community in the United States (already about one-sixth of our population and projected to rise further in coming decades). So, despite much of the doom and gloom we hear of late among folks in and around Washington, D.C., our country stands to benefit greatly in growth over the next several years from this factor.



10 to Benefit from Emerging Market Growth

CountryFundStock
Symbol		Recent
Price		Average
Annual
10-year
Return
(or since
inception)
AustraliaAberdeen Australia Equity FundIAF$12.0917.22%
BrazilMarket Vectors Brazil Small-Cap ETFBRF$52.9621.21%*
ChinaTempleton Dragon FundTDF$30.4620.86%
IndiaMorgan Stanley India Investment FundIIF$22.1524.19%
IndonesiaAberdeen Indonesia FundIF$13.8428.85%
IsraelAberdeen Israel FundISL$17.0711.12%
MexicoMexico FundMXF$26.9516.73%
RussiaTempleton Russia and East European FundTRF$21.4823.90%
TurkeyTurkish International FundTKF$15.2918.34%
United States of AmericaFidelity Low Priced Stock FundFLPSX$41.7010.35%
* annualized return since inception, 5/12/09



Here then (at the table) are my current picks of ten funds offering, I think, relatively exciting returns, poised to take advantage of emerging market dynamics in the years ahead. Most of them have ten-year records that far exceed that of the S&P 500 Index. The exception is the Brazil Market Vectors Small Cap ETF (BRF) which does not have a ten-year record but has an annualized performance since inception of 21.21%. While this portfolio is intended for a long-term hold, 5-10 years or so, I would carefully examine such funds periodically to assure they still deserve inclusion in this grouping. However, a down year for one or two of them need not indicate it is time to sell. Rather, it will probably reflect that the markets for the countries they represent have simply been off. Those down substantially may thus be good candidates for the addition of new funds, so one can average down one's per share cost basis. It likely will also be helpful to rebalance one's emerging market dynamics portfolio annually, adjusting, for instance, when the market value of one or more of the ten assets rises or falls significanly relative to the others.


As always, I suggest that investors do their own due diligent research and/or consult well trusted financial advisors before purchasing any securities cited here. As in the disclaimer, my wife, Valerie, and I own shares in a number of these assets at this time. We intend before long to purchase shares in the balance of them as well.


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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