Rebound Emerges for Emerging Markets

The situation looks ripe for recovery in some hard-hit overseas markets.
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It's Monday, which means it's time to answer readers' questions from the Global Portfolio mailbag.

Ram Seshadri

asks if all the turmoil in emerging markets is ever going to be over. Even though those countries (he cites Thailand, Malaysia and the Philippines) have strong growth, "Their stock charts look like there is a depression going on," he says. Can it really be that bad? he asks, adding that he thinks there is a bottom forming.

Actually, for many emerging markets, the bottom may have already occurred and those markets have started to bounce back. As Seshadri notes, after experiencing terrific returns last year, most emerging markets around the globe have had a tough 2000. That must be a little frustrating for the governments (as well as the investors) in those nations that have made a real turnaround since the financial crisis of 1997-'98.

The three countries Seshadri mentions are prime examples of countries in which markets have suffered this year, although I would hesitate to make any of them poster children for postcrisis economic reform. Thailand's benchmark

SET

index is down 36% since the beginning of the year, while the Philippines'

PSI

index has plunged 27%. Malaysia's

KLSE Composite

index has actually inched up 3% this year, but is down 16% since a late February high.

Rather than being driven by local fundamentals, in general, emerging market stock performance has been closely affected by events in the U.S., including interest rate hikes and concerns the U.S. economy will experience a recession-inducing hard landing. The latter is a major worry for emerging economies, since the U.S. is the chief export market for most. However, as signs of a benign slowdown have appeared and worries the

Federal Reserve will not raise interest rates (much more) abate, emerging markets have begun to rebound. For example, India's

BSE Composite

index is up 27% since its late May trough. Mexico's

IPC

index is up 33% over roughly the same period.

Thus, I think (and many of my sources agree) the outlook has improved for emerging markets as a whole for the second half of this year. Many will benefit because the strong growth rates we saw last year and during the first quarter of this year have slowed to more sustainable levels, meaning their central banks are less likely to raise interest rates.

Investors need to be very picky when investing in emerging markets. Rallies in emerging markets occur in countries that at first glance look terrible, but have faint glimmers of hope. Case in point: last year's boom in countries that had been devastated by the financial crises of the previous year or two. Few predicted that their economies would recover so quickly, but they did and the markets followed suit. Thus, the emerging markets that are mentioned now as intriguing prospects are a veritable who's who of volatile nations, politically and economically. They include: Colombia, Pakistan, Russia and Argentina. Rallies in these markets are not inevitable. I am not particularly optimistic about the prospects over the next few months for the three countries Seshadri mentioned.

Emerging markets are still attractive, however, because of their potential to turn in high returns. But country-specific investments are very volatile. A less risky strategy is to buy a broad, emerging markets fund. The best performer in that category is the

(ODMAX) - Get Report

Oppenheimer Developing Markets Fund, which is up 9.1% this year, and 48.4% over the past 12 months. It requires an initial investment of $1,000 and carries an expense ratio of 2.37%. (One fund listed in the emerging markets category, the

(LETRX) - Get Report

Lexington Troika Dialog Russia Fund has actually returned 9.8% this year, but it is really a single-country fund lumped into the emerging markets category because there is no category for all-Russian funds.)

Other readers also inquired about emerging markets.

Fernando Diaz

asks about information in investing in Bolivia and writes: "I believe that some legislation that is in the works in Bolivia could greatly favor the Bolivian stock market." Options are limited when it comes to investing in Bolivia. There are no Bolivian companies listed on the

New York Stock Exchange

or

Nasdaq Composite Index

and there are no country-specific

closed-end or exchange-traded funds. I could not find a regional Latin American fund with any significant holdings in the country. If Diaz is right (since he doesn't specify the legislation, I don't know if he is) there seems to be no way to take advantage of it.

This week, International Editor

Andrew Morse

and I will discuss the state of international investing with Steven Schoenfeld, head of international equity strategy for

Barclays Global Investors

, the largest manager of index mutual funds in the world. Schoenfeld's company manages $800 billion in assets. The transcript of our discussion will appear in Saturday's "Streetside Chat." Check in to hear his opinions on how the global economy is doing and how investors can take advantage of opportunities outside the U.S. in the coming months. Got a question you want to ask him? Shoot me an e-mail at

dkurapka@thestreet.com.

David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.