Tuesday, May 19, 2009

Welcome to the Emergent Emerging Markets Century

Okay, maybe it’s more than a tad premature to call a good couple of years the start of a century of exceptional economic performance. Nevertheless, if there is one place, from both an economic and investment basis, where investors are well advised to have an above average investment weighting it’s the emerging markets. The following presents a few core elements, both fundamental and technical analysis, which provide a hint as to why having such an exposure is prudent.

From a fundamental valuation perspective, EEM compares quite favorably to the developed economies on both a growth, diversification, and valuation level. As the first table shows, the mix of EEM (emerging markets ETF) is substantially different than that of either the S&P 500 and the EFA. What may be surprising are the large exposure to Info Tech and the relatively low exposure to Industrials. You can also see the favorable comparisons in P/E with beta where you would expect it to be.

From an economic growth perspective, the IMF chart that follows makes it abundantly clear that economic growth over the next few years resides in developing and not developed (advanced) economies.

From a technical analysis perspective, the above positives for emerging markets are reflected in the following charts.

The first chart shows the solid upside breakout from a significantly improving base that is poised to produce an mega trend reversal (regular readers of this blog know what that means), which has further upside potential for something beyond a tradable rally.

And from a comparative performance perspective, the non confirmation in early March has been rewarded with a far superior run thus far.

Investment Strategy Implications

The above provides a very brief description as to why emerging markets have exhibited and will likely continue to exhibit outperformance vis-à-vis developed markets. But don't take just me word for it - Mohammed El-Erian (Mister Bumpy Road to the New Normal himself) seems to think so. And he controls a lot more money (and influence) than little old me.

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