Holderith: Looking Beyond BRIC For Returns

August 06, 2012

Some developing countries might be lagging on their Olympic medal count, but they are certainly ahead of the game in the emerging markets space, EG Advisors’ head says.


International equity ETFs are raking in new assetsto the tune of $3 billion in July alonethanks in part to investors’ appetite for emerging markets exposure at a time when much of the developed world is engulfed in economic uncertainty. What’s more, Chinathe “C” in BRICmight hold the bulk of investor attention as the world’s most populous country, its largest emerging economy and the nation with the biggest Olympic medal count so far this year.

But Emerging Global Advisors’ President Robert Holderith made the case to IndexUniverse Correspondent Cinthia Murphy that there’s a whole world of hidden gems beyond BRIC when it comes to investment opportunities in the developing economies. They might be far from the limelight or even seriously lagging on their Olympic performance, but they bring sizable returns to the table.


Murphy: Why has the performance of broad emerging markets ETFs been relatively so poor when compared with the U.S. stock market in the past year? We are talking losses of more than 20 percent at a time when the S&P 500 was mostly flat.

Holderith: One reason emerging market indexes have been down so much in the last year is because the U.S. dollar has been so strong.

If you look at Brazil and India, the dollar has been about 20 percent stronger than those countries’ currencies. Even if stock prices there are doing well, a U.S. investor’s returns on equities in those countries are off by that much. If you are a local investor there, your returns on the same investment would be positive, so currency is a big element here.

But we believe this is a short-term phenomenon; low P/E ratios, lower debt-to-GDP ratios, faster GDP growth than developed economies are all important factors supporting emerging market economies.

Murphy: But there are currency-hedged emerging markets alternative in the market today that would protect investors from volatility in the downside. Would that be a good way to tap into emerging markets right now?

Holderith: No. My view is that the cost of hedging hasn’t proved to be worth it over time.

Murphy: Is what’s been going on in Europe a key factor in the performance of emerging markets funds?

Holderith: It’s important to make a distinction here. When you look at emerging markets, there are three tiers to be considered: there is South Korea and Taiwan—which should not be considered emerging economies—there are the BRICs, and finally the less mature economies.

BRICs, along with South Korea and Taiwan, are more closely tied to developed markets than the less mature economies because they “grew up” at a time when it made sense to look to developed markets such as the U.S. and Europe for consumers for their exports. They were looking for the thriving economies at that time—we are talking early 1980s, early 1990s. Those more established emerging markets are very export driven, which makes them that much more susceptible to the economic crisis in Europe and the U.S. Many of the broader emerging market funds are heavily focused on BRICs.



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