Trade winds may be swirling in favor of emerging market countries sitting on a surplus, not riding on stimulus.
Feeling a change in the air? Autumn is the time when summer heat fades, sometimes into brilliant colors. And such is the state of developing markets around the globe. Some of the hottest growth countries like India, Turkey, and Brazil met with a quick exit of investor liquidity. That’s because rising bond yields (see figure 1) left these economies vulnerable to large trade deficits and growth fears. The climate certainly has turned for them. But like rare warm October days, some emerging market (EM) economies, namely those powered by exports, now shine. Think: China, Korea, and Taiwan.
Trade surpluses insulate manufacturing-heavy economies from some of the worries of liquidity collapse when global stimulus (a.k.a. ultra-low interest rates) goes bye-bye. That means they’re positioned to take advantage of both seasonal and long-term improvements in global growth.
Easy Come, Easy Go
For some time, stimulus had allowed strong foreign fund inflows into higher-yielding EM equities, but the prospect of “tapering” that stimulus triggered outflows across the EM spectrum.
Now, shifts in accommodative monetary policies loom like November storms (although who knows when we’ll actually see the central banks turn from blowing hot air into taking action). Of course, as developed economies strengthen to the point that stimulus is no longer needed, their demand for goods from export economies strengthens, thus comes better positioning for export-heavy countries against the “tapering” tempest.
For Your Consideration
Let’s look at a couple of these exporters for a snapshot of shifting conditions:
|2014 projected GDP growth: 7.5%|
|$28.5 billion trade surplus|
|Chinese producer price index down 1.6% month over month|
|Overproduction compared to U.S. and Eurozone slowdowns|
|Commodity price fluctuations|
|Domestic shift to consumer versus export economy|
|2014 projected GDP growth: 3.0%|
|$4.6 billion trade surplus: 3.6% increase year over year|
|Core inflation down 0.23% to 0.5% overall|
|Rapid currency appreciation from foreign fund inflows|
|Heavy concentration in tech sector exports|
|Ongoing tension and interdependence with China|
Source: Bloomberg, S&P Capital IQ
And now, the exchange-traded funds (ETFs) linked to this changing EM picture: iShares China Large-Cap ETF (FXI) offers exposure to exporters as well as to Chinese domestic growth; iShares MSCI Taiwan ETF (EWT) provides exposure to the tech-heavy exporters in Taiwan; South Korea exposure could be added with iShares MSCI South Korea Capped ETF (EWY); contrarian investors may seek out the non-export focused EM segments, including iShares MSCI Turkey ETF (TUR) or iShares MSCI India ETF (INDA). Please note that the examples of the ETFs listed above are non-diversified.
Obviously, not all EM countries are created equal, with trade surplus versus trade deficit perhaps the starkest differentiator. As such, always keep an eye on the global economic climate so that you have an idea when the next wind change is stirring. Conditions can cloud over at any time. Emerging markets investments tend to be less liquid and more volatile and are subject to a number of additional risks, including but not limited to geopolitical instability and currency exchange fluctuations. These remain risks to these bright spots in the emerging market autumn.
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