The Japanese Nikkei 225 continues to hold above 13,000, but with the index still up 56% from its recent low in mid-October, I continue to advise you to look elsewhere. The index was down 23% after its recent correction, but it has rallied four percent since. Even so, I would avoid Japanese stocks. (Read “Why Nikkei Sell-Off May Foreshadow Things to Come.”)
My feeling is that the emerging markets will continue to offer the best risk-to-reward investment opportunities. This is where the new wealth is and where people want to spend. The end result will be a rise in consumer spending in the emerging markets and their respective economies.
Longer-term, China remains a top area among the emerging markets, but we have to get past the near-term growth issues and an underperforming stock market.
I would rather be looking at some of the smaller Asian emerging markets that have major trading with China and Japan. Here, we have the four “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. While South Korea has been disappointing, Taiwan has delivered some excellent returns this year; Singapore has, too, but to a lesser degree.
In my view, South Korea is worth a closer look for those in search of a market that has underperformed. The country has numerous global multinationals, such as Samsung Electronics Co. Ltd., Kia Motors Corporation, Hyundai Motor Co. Ltd., and LG Corporation. The region is hurting a bit now due to the associated stalling in China and the recession in the eurozone, but longer-term, I’m bullish on South Korea.
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Another country from the BRIC (Brazil, Russia, India, China) group that has been under duress is Brazil. The country is facing high inflation from years of expansion and spending. Inflation has become problematic in the country, with the inflation rate at an annualized 6.13% in January, which makes interest rate risk quite high. The country’s gross domestic product (GDP) growth slowed to an annualized 2.2% in the first quarter, which is well below the readings in the previous years. In my estimation, Brazil will face hurdles in the short term, but there are opportunities to buy on current weakness.
My reasoning is that the newfound wealth and growing middle class in these emerging markets will drive consumer spending and economic growth.
The chart below of the iShares MSCI Emerging Markets index shows the mixed trading since early 2011; but notice the possible formation of a bullish flag, as indicated by the blue lines on the chart.
Chart courtesy of www.StockCharts.com
In Europe, while the eurozone is gripped in a recession, there will be buying opportunities in the emerging markets of Eastern Europe—namely Russia, the largest economy in Eastern Europe, and Poland, the second-largest economy in the region.
The bottom line is: to diversify and drive up higher returns, take a look at the emerging markets and the companies that operate there, especially those with a presence in the global economy.