Worldview: Guide to Global Investing
This article follows Worldview’s earlier report on Mongolia and presents the recent performance of Mongolian equities, currency, and interest rates. One of the challenges of investing in Mongolia is that data is harder to come by than for many other emerging markets, and so this presentation will not be able to perform the full sets of analysis that have traditionally been a part of Worldview articles. For example, MSCI does not keep an index, total return or otherwise, on the Mongolian market. We do, however, take what data is available use it in the most meaningful ways available.
What does a US investor stand to gain from international portfolio diversification? This analysis discovers that diversification benefits would have made it beneficial for an investor with any risk profile to include emerging Latin American market indexes in a US portfolio from 1992 to 2006, rather than investing solely in S&P.
Although several studies exist on the benefits of international diversification (e.g., Grubel 1968; Levy and Sarnat 1970; Lessard 1973; Odier and Solnik 1993; and Eun and Resnick 1994), the benefits to the foreign investor in emerging Latin American markets are still under-researched. In addition to the question of whether it’s worthwhile for US investors to include emerging Latin American market equities in their portfolios, there is also the issue of what the optimal portfolio mix for such investors would be.
Mention Mongolia, and most people will conjure images of horse-mounted hordes rushing across the Asian steppes, building the largest land empire the world has ever seen. While Mongolians are understandably proud of their heritage, which has included ruling three present-day BRICs (China, India, Russia), much of the Middle East and parts of Eastern Europe, the Mongolia of today is a much smaller affair, consisting of just over three million people—approximately the population of Jamaica—scattered across an area roughly the size of Iran.
In an earlier article, we discussed the strength and attractiveness of the Turkish economy. In part II of Worldview: Turkey, we will look at the currency, fixed income, and equity markets. In brief, Turkey has many attractive emerging market characteristics, but its risk-adjusted performance as an equity investment, while positive, has not been as outstanding as its economic performance would suggest it could be.
It is almost cliché to call Turkey a bridge between worlds, but on closer inspection, the country is difficult to describe as anything else. With a foot in Europe and a foot in Asia, Turkey truly is a crossroads between the East, West, and Middle East, a role shaped by its location and cultural geography, as well as its history.
Egypt—land of pyramids, sphinxes, and pharaohs—is changing with the times. Political and economic liberalization in the 1990s and 2000s has made Egypt an exceptional frontier market that is still worth investigating as part of an asset allocation. Although equity performance has been extraordinary and the chronic currency devaluations of earlier years have largely passed, investors should be aware of the political risks stemming from Egypt’s authoritarian political structure, aging president, highly unequal wealth distribution, and fundamentalist social movements.
The uniting of Brazil, Russia, India, and China under the acronym BRIC constitutes an acknowledgment of the significant role that developing economies are likely to play in future global growth and investment opportunities. BRIC encapsulates the importance of the three largest developing countries (Brazil, India, China) and stresses the notability of economic transitions in formerly socialist countries such as Russia. But as interest in BRIC has heated up, Africa—traditionally a central topic in economic development work—has been conspicuous by its absence. In many ways, however, the nation of South Africa can be thought of as the African BRIC: all in all, it’s just another BRIC in the emerging market wall.
The Philippines is a key participant in Asia’s growth story: one of the few countries that can be described as a former US colony, it has many characteristics that should make investors at least pause to investigate. The US colonial heritage, for one, has left in place an economic culture favoring markets and capitalism. Low-cost, relatively educated, English-speaking labor has meant that Philippine call centers and other business-service providers can compete with India for business from firms that are offshoring their business processes. Extensive mineral deposits can also feed China’s voracious commodity appetite. Nonetheless, political and geographic factors create risks that have handicapped economic performance to below what traditional economic indicators would suggest is possible.
Interest in Vietnam exploded in 2006 when the Ho Chi Minh stock index (Bloomberg: VNINDEX:IND) grew 144% in one year, forcing global and emerging-market investors to sit up and take notice. Those fortunate enough to catch the “sweet spot” of that growth—from January 31, 2006, to February 28, 2007—saw a 264% capital gain in just 13 months. Vietnam realized the highest gains of any emerging market in a year when emerging markets were one of the strongest asset classes around, prompting investors and emerging-markets strategists to wonder if Vietnam might be “the next China.”
Brazilians often point out proudly how blessed their land is. “Brazil has no natural disasters: no earthquakes, no tornadoes, no volcanoes, no hurricanes,” they say. Some add, chuckling lightly, “Our disasters are all man-made!”
The financial crisis engulfing the globe has arrived recently on Brazil’s shores. Brazil is no stranger to financial and political stress; indeed, over the last thirty years, the country has endured debt crises, extended hyperinflation, currency crashes, seven currency changes, economic recession, unemployment, the transition from military to civilian government, presidential resignation to avoid impeachment, banking failures, and, more recently, a period of rapid domestic and export growth that breaks with traditional experience. The consistent theme throughout these challenging years has been Brazil’s resilience: both economic and social.