Daily Gains Letter

These Emerging Markets to Benefit from New Global Economy

By for Daily Gains Letter |

Are Smaller Emerging Markets the Next Big Trade for Investors?While the majority of Americans might not have passports, that doesn’t mean we should avoid investing in foreign countries—especially in this market. Since rebounding in 2009, the S&P 500 has climbed around 145%, peaking on May 22 at 1,687.18. And that’s when it all started to go wrong.

On May 22, the Federal Reserve hinted that since the U.S. economy seemed to be on the right track, it might begin to ease its $85.0 billion-per-month quantitative easing policy. Just the idea of losing out on free money sent the markets into a frenzy—over the following two weeks, the S&P 500 lost more than four percent of its value.

While the S&P 500 regained some ground, it continued to be volatile leading up to the Federal Reserve’s June 19 meeting. During that meeting, the Federal Reserve announced that while it would continue with its quantitative easing policy, it would still ease the $85.0 billion-per-month program by the end of the year, and could end it altogether in 2014. Over the following two days, the S&P 500 slipped almost four percent.

While many investors are worried the U.S. economy will not be able to sustain itself without the Federal Reserve’s bond-buying program, there are other markets that investors can turn to if they’re looking for protection and wealth creation.

But bigger is not always better in this economic climate. On June 19, the Hong Kong and Shanghai Banking Corporation (HSBC) said its preliminary monthly Purchasing Managers’ Index (PMI) for China fell to a nine-month low in June of 48.3; a reading under 50 indicates a contraction.

Since May 22, the iShares MSCI China Index (NYSEArca/MCHI) exchange-traded fund (ETF) has fallen more than 14%, and is trading down more than 19% since the beginning of January. The MSCI China Index contains more than 130 stocks with net assets of $1.26 billion, with the majority of its holdings being in the financial, energy, and telecommunication sectors.

Similarly, since May 22, the iShares MSCI Emerging Markets Index (NYSEArca/EEM) ETF has fallen 15%. It is also trading down roughly 17% year-to-date. The MSCI Emerging Markets Indices cover over 800 securities in the biggest emerging markets, including Brazil, Mexico, Russia, China, India, South Korea, and Malaysia.

But the lesser-known iShares MSCI Frontier 100 Index (NYSEArca/FM) ETF is performing much better. It has lost just 4.5% of its value since May 22 and is trading up 8.5% year-to-date. The Frontier 100 Index contains over 100 securities in some of the strongest emerging markets, including Kuwait, Qatar, Nigeria, Kenya, Kazakhstan, and Vietnam.

While the markets will continue to be volatile in the coming months, it’s important to remember that once the Fed starts to rein in its quantitative easing, the markets will (hopefully) revert to being driven by economic data alone.

Those equities and ETFs that are performing well on their own merits should continue to do so once the economy improves.

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