The Long Road: Emerging Markets A Safer Haven?

March 14, 2008

Latin America and parts of Asia are expected to outperform developed markets through year-end as U.S. economy slides.

 

While stocks are showing renewed signs of life, economists still are bracing for a slowdown in the U.S. during the second half of 2008.

But some analysts say they're optimistic about prospects next year. Whether that happens or not, several countries figure to withstand a slump in western economies better in the meantime.

Should that impact your investing? As Larry Swedroe points out in an ongoing debate on IU's discussion board, correlations between gross domestic product and stock markets are murky at best.

He contends, in fact, that they're negatively correlated.

Maybe so. But it's also true that economic data started suggesting a widespread downturn in the flow of investment capital and purchasing of goods and services in many segments early last year. Primarily, that was coming from financial-services-related areas.

Sure enough, it was just a matter of time before financial stocks felt an impact. Although it was delayed until late summer, and the severity unexpected due to a meltdown in mortgage-backed securities, markets were weakened.

"The probability we're in a recession right now is almost 100%," said Virendra Singh, a Moody's economist. "All of the problems of the financial markets are definitely leaking into the stock markets."

But one reason for optimism, according to Singh, is that policy makers finally seem serious about taking action. He pointed to U.S. Treasury Secretary Henry Paulson's proposal to scrutinize lending practices more closely made public in a speech on Thursday. Earlier in the week, a Fed move to shore up banks' sagging fortunes by providing some short-term liquidity relief also was greeted with cheer on Wall Street.

"The Federal Reserve is becoming much more aggressive about lubricating the financial markets, which are all gummed up," Singh said. "The Fed and the U.S. government are moving in the right direction now."

And a tax rebate coming in May should also help anemic consumer spending, he added. "That's very important because over 70% of GDP comes from consumption," Singh noted.

As a result, Moody's economists are optimistic that even though the third and fourth quarters look rough this year, in early 2009 the U.S. economy should be ready to move ahead.

The problem for investors, of course, is predicting when and how deep such macro trends will be felt by financial markets. If you've got the luxury to plan long term, then a mild recession probably isn't anything to get worked up about.

But if you're on a fixed income and can't afford to lose much in the interim, consider that economists like the prospects for eastern Asia. "China will take a small hit, but not as big as the U.S. and other parts of the world," Singh said, noting he's not speculating on markets but broad economic data.

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