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Emerging Markets Will Shine in 2012

Perhaps it is my surroundings, but I have emerging markets on my mind this morning. I’m writing this article from, of all places, Paijan, Peru, where I’ll be spending the Christmas and New Year holidays with my inlaws (see map of Paijan). Paijan is a small farming and ranching town on Peru’s Pacific coast that epitomizes the best and worst of an emerging market country like Peru. You see unlimited opportunities here, non-stop new construction, and a steady stream of migrants from the surrounding hinterlands who are motivated to climb their way up the social ladder. Every man, woman and child is an aspiring entrepreneur, whether they be operating a restaurant out of their home, using a modified dirt bike as a taxi, or selling ice cream to passersby in the Plaza de Armas. Mobile phones—and even BlackBerries and the occasional iPhone—are ubiquitous. And yes, Paijan even has high-speed internet access, provided by a local subsidiary of Spain’s Telefonica (TEF). There is an energetic buzz in the air and a sense that progress is possible.

But lest I paint an unrealistic picture, Paijan is still a third-world farm town. It suffers from poor-quality education, periodic power outages, and the sorts of social divisions that tend to pop up with rapid growth. Violent crime is on the rise, and you don’t want to be on the highways after dark for fear of being ambushed by armed bandits (I’m not joking, by the way).

And good luck getting to Paijan. Road infrastructure is mediocre at best; the Panamerican Highway is roughly on par with a pre-Interstate 1940s U.S. highway. Flights to the nearest airport in Trujillo are often delayed or even arbitrarily cancelled. And getting simple questions answered can be an exercise in frustration.

Still, the contrast between Paijan—and by proxy Peru and the whole of the emerging market world—and the debt-laden economies of Europe and North America is telling. It’s the difference between people with real hopes of growth and improvement versus people struggling to maintain what they have. It’s optimism vs. pessimism.

We still have a few trading days left in 2011, but it is safe to say that this wasn’t a good year for emerging market investors. In a year in which the S&P 500 was flat, most emerging markets suffered what I’d consider a bloodletting. Even after bouncing sharply off of their October lows, nearly every emerging market ETF is solidly in the red for 2011. To give examples of a few that I follow:

  • iShares MSCI Emerging Markets (EEM): Down 15% YTD
  • iShares MSCI Turkey (TUR): Down 30% YTD
  • iShares MSCI Brazil (EWZ): Down 23% YTD
  • iShares MSCI Peru (EPU): Down 17% YTD
  • iShares FTSE China 25 (FXI): Down 15% YTD
Even my beloved Emerging Market Consumer ETF (ECON), which should be fairly insulated from the macro issues emanating from Europe, is down 7 percent year to date. In a word, ouch.

In a globalized economy, no crisis is ever purely local. Turbulence coming from Europe rocked the Old Word’s trading partners in Asia and Latin America, and when investors went into “risk off” mode, emerging market equities were among the first to be sold.

In 2012, I see a major reorientation of the world economy. The reorientation has actually been underway for years, but it should noticeably accelerate in 2012 and the years that follow due to Europe’s crisis.

The “emerging market” growth model of the last 60 years has been pretty cut and dry—produce as cheaply as possible and export to the United States and Europe. This strategy was great, so long as the Americans and Europeans were buying. But with American households still in the process of deleveraging and with Europe in the early stages of what will most likely become a Japanese-style slow-motion depression, it looks less and less viable as a model for growth.

2012 will be the year of the Emerging Market Consumer. With demand from the developed world tepid at best, trade between emerging markets themselves will accelerate, with an emphasis on the new middle and leisured classes.

By and large, emerging market consumers, companies and governments are starting with low levels of debt; there is no “debt overhang” and no need for the pain of austerity and deleveraging the developed world is suffering. In other words, most emerging-market economies still have a ways to run.

Investors wanting to profit from these developments can go about it one of two ways. You can buy shares of emerging-market companies that sell primarily to the domestic market using an ETF like ECON (or any of its holdings), or you can buy shares of Western firms like Telefonica that get a large percentage of their revenues from emerging markets.

About the author:

Charles Sizemore
Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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Comments

JeanPierreSarti
JeanPierreSarti - 2 years ago
Good tip on TEF. In fact similar arguments have been made about STD except that it is a dreaded European bank that really isn't all that European. Large Multinationals with healthy dividends to boot have been good to me the last few years.
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Those are still modest declines. While the economies may continue to expand, the main buyers of emerging market equities may themselves be facing the effects of austerity measures so I wouldn't be surprised to see any deals get even more enticing. Moreover, those markets are in competition with developed markets. Deep declines 'at home' can attract away many, as they say, 'value' orientated investors, leaving only the 'growth' investors in the emerging markets. It may be the case that the intrinsic value of some emerging markets has to reach blindingly obvious levels before investors leap en mass. "the year of" may move from 2012 to 2013 to 14...

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