Why It Might Be Time to Consider Emerging Markets Again

by Inya Ivkovic, MA

Last month, North American markets posted their first positive monthly returns in a year. Most investors appear elated, for which I honestly cannot blame them. Yet, I still remain a skeptic for the time being, at least where stock markets on this side of the world are concerned.

However, even a life-long skeptic like me would have to acknowledge that emerging market indices are quite another story. For example, Brazil’s major stock market has been up-trending since last fall, gaining 42% from October lows. In Chile, the country’s leading benchmark gained 26%, while China’s FTSE Xinhua 200 index gained an amazing 54%!

Better yet, although such gains could suggest that a short-term peak could be on the approach, emerging-markets observers believe that there is still room for further gains. What makes China in particular so attractive? Simply, the obscene amounts of money being thrown into the country’s financial systems as part of an aggressive stimulus plan, in combination with an ever growing middle class, are doing the trick.

China has cooked up a $762-billion economic stimulus package, the intention of which is to bring the country’s economic growth rate back to nosebleed levels of eight to nine percent. And although it is not exactly clear what financial institutions are supposed to do with that money, or how much of it is fresh capital, market watchers go as far as to say it doesn’t really matter. The Chinese government is hell bent on doing anything and everything it needs to do to catapult its economy back into the stratosphere. That said, if the assumption is that stock market performance moves in parallel with a country’s GDP, then China is very likely going to be a world leader in the medium and long term.

How can ordinary investors get a piece of that growth and performance? Currently, there are 44 Chinese companies listed on the New York Stock Exchange, as well as numerous exchange-traded funds (ETFs), which can easily be purchased by North American investors, providing them with the potentially very necessary exposure to China in their portfolios.

What should you look for specifically? True, I consider all emerging market players inherently risky investments, and particularly those headquartered in China. However, I would first focus on telecommunications companies, particularly mobile phone providers, which have reported considerable increases in revenues and earnings for the recent quarter. As to where to go from there, note that the Chinese cell phone ownership rate is still comparably low at 46%, which means that there is still a fairly big piece of pie left unclaimed in a country in which about 1.3 billion people live.

Another sector emerging in China as a potential growth story is that of insurance companies. Before you start saying I must have lost my marbles to even mention insurers, just remember that, with China, it is all about the burgeoning middle class. True, insurance companies around the globe have been hit hard and below the belt. However, the Chinese populous middle class is getting past its subsistence stage and has entered the asset gathering stage, which also means it will need insurance policies in droves for the people’s properties and lives. China’s insurers are already seeing substantial, double-digit increases in premiums and policy fees for fiscal 2008 in comparison to the prior year.