Emerging Markets are expected to be increasingly large contributors to the global growth in the coming years. Usually the BRIC nations come to mind when investors think about investing in the emerging markets and many investors’ portfolios already have some allocation to BRIC ETFs.
However, these four emerging giants are currently experiencing significant challenges that may inhibit these economies from repeating their stellar performance of not so distant past. (Read: Turkey ETF: Excellent Run, But Risks Ahead)
We recommend that the investors should look at some of the smaller, overlooked countries that present better opportunities for growth of their investments in the coming years.
Below, we look at the four BRIC countries that the investors should considering underweighting in their portfolios and four PICK countries that they should consider investing in. (Read: Invest in Indonesia-The New Rising Star of Asia)
Brazil benefited immensely from the decade long commodity boom, but is now suffering from the slowdown in its major export destinations. According to the latest survey of economists by the Brazil’s central bank, the GDP will grow at a rate of just 2.18% this year. The central bank began cutting rates in the second half last year and now the key rate is at a record low of 8.5%.
The government has taken a number of measures to stimulate the economy, as a result of which unemployment has remained low and consumer demand continues to be strong but the infrastructure, industry and investment continue to suffer and will continue to impact growth. The Brazilian stock market is down 6.4% year-to-date, as a result of the slow-down.
Per IMF, Russia’s economy grew at 4.3% last year and will grow at 4% rate this year. However, it will not be long before the effect of falling oil prices impacts Russia’s growth. Since Russia is the largest non-OPEC oil producer in the world, the economy’s performance is very much dependent on oil prices.
Further, though the new Putin administration has announced a number of liberal reforms; the investors so far appear unimpressed due to the past record of his government. (Read: Why Russia ETFs Are Not A Debt Crisis Safe Haven)
India’s pace of growth is slowest in about a decade mainly due to rising inflation, widening fiscal and current account deficit and a weakening currency. Rating agencies have downgraded the outlook on the country’s credit of late and warned that it may be downgraded to junk status. (Read: India ETFs: Trouble On The Horizon?)
Prime Minister Singh, who was the chief architect of major market reforms introduced in early 1990s, has taken over the role of finance minster again. It remains to be seen whether he will be able to end the current state of policy paralysis in India.
If India does not reform its foreign investment laws and take effective steps to bring the budget deficit and rampant corruption within control, the double-digit growth that it enjoyed during 2004-08, may remain a thing of the past. (Read: Forget T-Bonds, Invest in Top Corporate Bond ETFs)
There are tangible signs that the slow-down in China may be much worse than earlier expected, even though there are always doubts about the accuracy of the official Chinese data. Recent reports show problems in manufacturing, housing and export sectors.
China's capital-intensive and export-oriented economy is facing strong headwinds due to economic conditions in its major export markets. While the country has renewed its efforts to promote domestic consumption and has made some progress in rebalancing the economy away from exports, the consumption is still just about 35% of GDP.
Apart from the slow-down, the investors should remember that Chinese economy has been maturing and will no longer be able to deliver the blazing growth. World Bank warned that China's economic growth may slow down to just 5% by 2026, unless it introduces some critical reforms in its financial sector. Further, with the big leadership transition later this year, we should not expect any important policy changes soon.
Additionally China has already lost its low-cost manufacturing advantage to some of its smaller neighbors. (Read: Buy These ETFs to Profit from Global Population Boom)
Peruvian economy has been growing at an average rate of 6.4% per year since 2002. Last year the growth was close to 7% after 8.8% growth in 2010, partly due to strong private investments. Per IMF, the economy will grow at 5.5% and 6.0% in 2012 and 2013 respectively.
Peru is one of the top producers of gold and silver in the world. In addition to precious metals, its main exports are copper, zinc, textiles, and fish; its major trade partners are the U.S., China, Brazil, and Chile. The central bank has kept the key rate unchanged at 4.25% since May last year as “inflation expectations have remained within its target range and pace of economic growth has remained close to potential”.
Reserves have almost doubled since the financial crisis while the public and private investment flows have remained very strong.
However, as minerals account for 60% of the country’s exports, the economy remains somewhat vulnerable to the slow-down in the Euro-zone and the U.S.
The investors should consider MSCI All Peru Capped Index Fund (EPU - ETF report)) for exposure to Peru.
Indonesia was one of the very few countries which had a positive stock market performance in 2011. Its bond market was the best performer in Asia last year. The economy is expected to grow at 6.1% and 6.6% respectively in 2012 and 2013 (per IMF) after an impressive 6.5% growth in 2011.
Rising domestic demand in the country is able to offset the weaker export demand. 65% of the GDP is domestic consumption driven in the Southeast Asia’s largest economy and thus the economy remains much less exposed to global economic headwinds.
Foreign direct investment has been rising in-line with the government’s target of attracting $22.4 billion in FDI this year, 18% higher than last year. Moody’s and Fitch have recently upgraded the credit rating of the country to investment grade.
On the flip side, inflation has been creeping up towards 6% and fiscal consolidation is the main solution in containing inflation (difficult task due to massive fuel subsidies). Corruption and poor infrastructure remain some of the main hurdles to faster growth.
Some of the protectionist policies adopted recently also add to the uncertainty and could affect the foreign investments.
The investors have a choice of two Indonesia specific ETFs: Market Vectors Indonesia Index ETF (IDX - ETF report) and iShares MSCI Indonesia Investable Market Index Fund (EIDO - ETF report).
Colombia’s economy has been doing well for the past many years as the security environment improved and political situation stabilized. Due to sound macroeconomic policies and surge in foreign investment, the exports and imports have quadrupled during the last decade.
The economy grew at 5.9% in 2011 and is projected to grow at 4.7% and 4.4% in 2012 and 2013 respectively (per IMF). GDP per capita has gone up more than 60% in the last ten years, backed by a surge in oil output and sound economic policies. Investment rate at 27% of GDP is among the highest in the region.
The country is enjoying a huge oil boom, primarily due to critical reforms to its oil sector, such as partial privatization of state-owned oil company and allowing foreign companies to bid for licenses without having to partner with the state oil company. Crude production has almost doubled over the past few years. About 40% of the foreign investment went in oil sector last year.
All three top rating agencies now have “investment grade” rating on Colombia; due to its improved security conditions and ability to deal with external shocks. As a result of improved investment environment, Colombia attracted foreign investment of $13.2 billion last year, which may go up to $16 billion this year, per government forecast.
Among the risks, unemployment rate at 10.8% is still among the highest in the region, though it has been coming down from more than 15%, about a decade ago. Apart from high unemployment, poor infrastructure, income inequality, high crime rate and drug trafficking remain the main challenges for the country. Also, appreciating currency could hurt the exports.
The investors looking for exposure to Colombia have two ETF options- Global X FTSE Colombia 20 ETF (GXG - ETF report) and Market Vectors Colombia ETF .
South Korea is one of the fastest growing OECD countries, with GDP growing at more than 4% rate during the last decade and projected to grow at 3.5% this year. Unemployment rate at 3.1% is among the lowest in the world.
While export competitiveness in Japan is suffering from a strong Yen (safe haven flows), Korea is in turn, gaining advantage as evident from the growing trade surplus. Fiscal situation is pretty strong with debt to GDP ratio of 40%.
Though in its latest annual review of country classifications, MSCI decided not to upgrade South Korea to developed market status from emerging market, the reasons were mainly related to currency issues (limitation in convertibility, absence of offshore currency market, lack of trading outside local trading hours etc.) and MSCI admitted that Korea continues to meet most of the Developed Markets criteria. Once the country gets upgraded, it may see sharp increase in capital inflows.
iShares MSCI South Korea Index Fund (EWY - ETF report) provides exposure to Korea.