Buy Emerging-Markets ETFs, iShares Says
NEW YORK (TheStreet) -- Economies of emerging and developed countries will further diverge in 2011, says Russ Koesterich, iShares chief global investment strategist. The best way to take advantage of that so-called economic decoupling is to purchase single-country ETFs in the fastest-growing emerging economies.
TheStreet
spoke with Koesterich about his forecasts for the New Year.
What is your economic outlook for 2011?
Koesterich:
For next year, we are going to be looking at what I call an economic decoupling. The developed world will continue to grow, albeit at a slow pace. Emerging markets, however, will grow much faster, particularly in places like
India
and Brazil.
How do you play this economic decoupling with exchange traded funds?
Koesterich:
The good news for 2011 is that it's going to be a good environment for equities. Even though growth is going to be slow, it will be fast enough to help earnings. You have low inflation and low interest rates. So investors want to do a couple things. First, they should leverage themselves to emerging-market growth. That means an overweight to sectors like industrials and technology. Also, they should use single-country ETFs to get exposure to those faster-growing markets.
You say in your latest note that there's a 25% chance of a double-dip recession. What should an investor do under that scenario?
Koesterich:
If the developed world falls back into
, you want to get much more defensive. I happen to think that
U.S. Treasuries
look very expensive right now. But under that scenario, I want to overweight longer-duration bonds by buying, for example, the
iShares Barclays Aggregate Bond ETF
(AGG) - Get Report
. I want to overweight the dollar, because I want that safe-haven bid. And within my equity portfolio, I want stocks and sectors that have pricing power in a weak environment. Traditionally that has meant consumer staples and health care.
In your latest note you also say there's a 10% chance of an inflationary scenario. What do you buy if that comes to fruition?
Koesterich:
The inflation portfolio looks very different. In the first year or two when inflation is picking up, you want to underweight equities because you tend to get multiple contraction. Obviously, you want to underweight bonds, with the exception of TIPS. I would buy the
iShares Barclays TIPS ETF
(TIP) - Get Report
in this scenario. And then take a larger position in commodities. Within commodities, precious metals, particularly gold have historically performed the best.
Finally, you say there's a 10% chance of a Goldilocks scenario with low inflation and strong growth. What do you do in that environment -- just load up on stocks?
Koesterich:
Exactly. We would love to get back to the wonder years of the late 1990s, but I don't think it's likely. If it were to happen, then equities would do best. So we would advise a heavy position in equities, especially riskier stocks and those stocks that do well when the economy is strong, like the cyclicals.
What is your top speculative ETF pick for 2011?
Koesterich:
For 2011, I am going to be somewhat contrarian and choose the
iShares MSCI Germany ETF
(EWG) - Get Report
. People don't normally think of Germany as speculative, but there is obviously a lot of pressure right now on Europe. People are worried about the longevity of the European Union. The irony is that Germany will do well with increased pressure on the euro. It's an exporting powerhouse, and it does not have the same fiscal problems as the U.S. I think it's a good contrarian play for next year.
-- Reported by Gregg Greenberg in New York.
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