I think there may be a window of opportunity left in frontier markets. Let me explain. In last month’s report, I noted that we should think of the US as a “huge money-printing machine that produces an unlimited quantity of dollars”.
Most of these dollars flow to the corporate sector, wealthy individuals, and financial institutions. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, where it boosts those economies’ economic activity and increases wealth relative to the US. I also warned that potentially spectacular bubbles could develop in emerging stock markets, as well as in selected hard assets (i.e. in precious metals, art prices, and prestigious properties). I am now beginning to think that even more spectacular bubbles could develop in frontier markets. How so?
I mentioned that the US transfers dollars to emerging economies through its trade deficit and investment flows. Emerging economies are then faced with the decision of what to do about the dollar inflows. If they let the currency appreciate, a temporary loss of competitiveness may result. (This is not my view, however.) If they do nothing, spectacular asset bubbles can occur that are accompanied by high consumer price increases. In either case, the price level (especially of assets) in traditional emerging economies initially increases compared to the level in frontier markets. What happens next?
International investors, sovereign funds, and wealthy individuals who live in more advanced neighboring emerging economies become aware of the huge differences in price (for everything, including all kinds of assets and services) between their own economy and that of the frontier region. As an example, wealthy Hong Kong, Singaporean, Korean, Taiwanese, and Japanese businessmen and investors (and their sovereign funds) won’t fail to recognize the enormous difference between real estate prices in their own relatively advanced economies and those in countries such as Cambodia, Vietnam, Myanmar, Mongolia, and Laos.
Now let us go back to the huge money-printing machine in the US, which transfers economic activity (including employment) and wealth to foreign countries.
First, US dollars flow to the countries with the highest current account surpluses and, as explained earlier, push these countries’ asset prices up either through appreciation of the currency or through high domestic price increases – or a combination of the two. In a second instance, this “additional liquidity”, which created enormous wealth in Asia, will flow to the least developed countries. I believe that in this context, Vietnam is currently an attractive investment destination.
I was recently in Vietnam and, as on previous visits since 1989, I was immensely impressed by the dynamism of its population and the ongoing economic growth. This is not to say that Vietnam is problem free (witness the struggle between the reformists and the hard liners in the government, the large trade deficit, high inflation of between 12% and 15%, a weakening currency, etc.), but for the first time in years the valuation of the equity market has become compelling.
For a modest exposure to Vietnam, investors may consider the purchase of the Market Vectors Vietnam ETF (VNM), which is listed on the NYSE.
Other stock markets that have failed to participate meaningfully in the global “asset reflation” since early 2009 include those in the Middle East, about which I have written before.
Obviously, as in the case of investments in Russia and Central Asia, the performance of the Middle Eastern markets will depend largely on stable or rising oil prices. However, oil and oil-related equities have begun to show favorable relative strength based on several technical indicators, which gives me some comfort when making these recommendations. Stable or rising oil prices should also have a positive impact on US oil stocks, and on Canadian oil stocks that have exposure to oil sands.
The Market Vectors Gulf States ETF (MES) offers an exposure to the Middle East.
Dr. Marc Faber
for The Daily Reckoning