Thursday, October 4, 2007

Emerging Markets: The New Safe Haven!

The US economy is tethering on the edge of recession. The subprime mess keeps getting messier. Investment banks are missing profit targets and writing off large chucks of change. The credit crunch is roiling the investment world. And this is not limited to the US and has spread to the rest of the developed world.

So what is the defensive play? Emerging markets – Really!

What is ailing the US market is not bothering the emerging markets. While the US stock market is vacillating, the Indian and Chinese markets are setting new records. Indian software-services firms may feel some impact of the US economic conditions but the impact is predicated to be marginal. And the Indian economy has branched out into automobiles, pharmaceuticals, steel, hotels and oil/gas – creating global companies that are providing strong economic foundation.

"It's increasingly clear that the U.S. isn't any longer the sole engine of global growth -- that other economies have, in effect, decoupled from it. Witness current events: The U.S. economy is getting buffeted by the housing downturn, but so far the world economy seems to be in fine fettle."
Decoupling - Wall Street Journal

The US economy is not the sole engine of growth driving the world economy. China and other emerging economies are beginning to drive global growth. And this growth is shifting from importing to the US, to importing to Europe and other emerging economies. Demand is also on the rise across Asia, Middle East and China – which is also creating robust growth opportunities for companies that have a global customer base.
"For several years, emerging Asian economies have accounted for more of global GDP growth than America has. This year China alone will for the first time accomplish the same feat all on its own (at market exchange rates), even if American growth holds up."
Stronger China - The Economist

So what do you do? Before you jump in remember that there are still challenges facing these economies. Political turmoil, social instability, terrorism, infrastructure etc. are real problems which plague the emerging economies. But the growth is happening in these global hotspots and not investing in these markets would be a folly. One option is to invest in emerging market funds and the other would be to invest in companies with a global foot print. There are many choices for investing - for an investor this needs to be a significant asset class in the portfolio.

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