James Dennin, Kapitall: Looking to invest in emerging markets? Mexico and South Korea may outperform as the Fed begins tapering.
Throughout the past decade or so, investors have been bullish on so-called 'emerging markets.' These investment opportunities even got their own nickname - the 'BRIC' countries. A Goldman Sach's (GS) banker coined the term for the emerging market "sleeping giants" of Brazil, Russia, India, and China.
[Read more on Emerging Economies from Kapitall: Chinese Tech Stocks Outperforming BRIC Markets]
When financial crises in America and the Eurozone made other, growing economies more attractive, investors flocked to mutual funds and exchange traded funds (ETFs) that focused on Asia and Latin America.Returns were high, but they were buoyed by China's ascent and high commodity prices. With Chinese development starting to slow down, analysts argue that while emerging economies still have the most room to grow, it's time to be more discriminating when making investing decisions. As demand for goods in China declines, and the easy money policies of America's Federal Reserve start tapering off, certain economies may be better situated for growth than others. The trend is particularly important, because until recently emerging economies were generally lumped together as 'buys' or 'sells' without much regard for specifics. As investors pay closer attention to the data coming out of individual countries, a better market for selling bonds and currencies from these companies is likely to develop. And some emerging economies will stand out as better equipped for the years to come. This has to do with how much a country is relying on foreign assets for investment – and what they've done with the extra liquidity stemming from American quantitative easing. According to an analysis from Goldman's economists, two of the healthiest economies looking ahead are South Korea and Mexico. Different reactions among currencies to the news that tapering could begin soon tells a story in and of itself. India and Indonesia's currencies fell 12% and 11% respectively. The Mexican peso declined less than half as much, and rumors that Mexico's new President Enrique Peña Nieto might relax oil nationalization have driven up optimism even further. South Korea's currency actually climbed, 3.8%. Investing ideas Stock prices usually rise alongside the currency of the country that company is in. This means battered currencies will create a favorable environment for finding undervalued stocks. However, foreign investment is not likely to recover to the same levels as back when nearly everything in the four BRIC countries was deemed a good investment.
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