Emerging Chronicle
January, 07 2013Investment Adventures in Emerging Markets
The Ripple Effect
In this interconnected world, what happens in the key economies of the U.S., Eurozone, and Japan this year will almost certainly impact the global economy at large, but the ebb and flow of action and reaction is shifting.
Emerging markets, for instance, are generally lessening their trade dependence on the U.S. and Europe, and there are other countries that can drive global growth—some of which may even surprise us in 2013. Emerging markets in general have had three characteristics in their favor:
- generally high economic growth rates,
- large amounts of foreign reserves
- and low foreign debt
Many emerging economies appear to be on the cusp of consumer booms as well as productivity advances, which should bode well for future growth potential.
Frontier Markets
We are particularly optimistic about the investment potential in the frontier markets, the lesser-developed of the emerging markets.
As exciting as they can be, one must be selective and very patient when investing in these markets. We have to look out well beyond one or two years, and generally take a five-year view. Growth rates in many frontier markets exceeded those of developed markets by a wide margin in 2012, and we believe that trend is likely to continue. The IMF has projected that during the next five years, 10 of the 20 fastest-growing economies will be in Sub-Saharan Africa, and two in North Africa. None are in the Western Hemisphere.
We anticipate growth in many frontier countries’ capital markets, too. Some of these markets are moving from small and illiquid to large and liquid.
Overall, as frontier market countries expand, they have continued to increase investments in infrastructure, offering investment opportunities in construction, transportation, banking and finance and telecommunications industries. Many frontier countries are leading producers of important commodities such as oil, gas and precious metals, making them well positioned to potentially benefit from anticipated growing global demand for these resources. Rising consumption can provide these economies with strong purchasing power and the ability to spend their way to growth.
Many frontier market countries have continued to be positively impacted by the substantial investments made by large emerging market countries such as China, India, Russia and Brazil. The economic drivers across frontier markets are diverse. For example, Botswana, one of the world’s largest diamond exporters, is introducing call and data processing centers. Kazakhstan, a country rich in oil and other natural resources, is investing in infrastructure development.
PREMIUM RECO : see our long term reco here We continue to invest with a long-term horizon in companies that we believe are undervalued, fundamentally strong and growing, and those that we think can weather difficult and changing times. We want consistent gains over a long period of time, without a lot of risk. I’ll be honest with you…We’re not going to get there by trading.
Last but not least, our job as an investor is to scour these countries for individual companies that show potential to be able to survive, and even thrive, in the face of these challenges. So here is PIMCO list of future Picks and Pans based upon the ongoing structural changes:
Picks
- Commodities like Oil and Gold
- U.S. Inflation-Protected Bonds
- High-Quality Municipal Bonds
- Non-Dollar Emerging-Market Stocks
Pans
- Long-Dated Developed-Country Bonds in the U.S., U.K. and Germany
- High-Yield Bonds
- Financial Stocks of Banks and Insurance Companies
And Bill Gross concluded his latest comment by warning that “Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice. Those purchases may be initially supportive of stock prices but ultimately constraining of true wealth creation and real economic growth. At some future point, risk assets – stocks, corporate and high yield bonds – must recognize the difference. “Costless” check writing does indeed have a cost and checks cannot perpetually be written for free.”