Emerging Markets Funds-Emerging Markets etf

2009 has been a good one for investors in emerging markets. Since reaching a low on November 20, 2008, the MSCI Barra Emerging Market Index is up 84%. Equity prices in the BRIC nations (Brazil, Russia, India, and China) are up a higher 93%.

Recently, equity prices are up quite strongly in Eastern Europe and trying to catch up with other emerging markets. During the past three months, the MSCI Barra Eastern Europe (excluding Russia) Index is up 28%. This exceeds the 18% and 20% gains scored by equities in emerging markets and BRIC nations, respectively.

As emerging markets continue to make gains, investors are being urged to consider investments in emerging markets. The reason being that prospects for economic growth in these markets are greater than those in the traditional markets of the US an UK and further, that such markets may be much more immune to the credit crisis.

But investors must be be aware of the issues facing emerging economies before parting with their hard earned cash, and these issues vary significantly from one country to another. While some emerging economies are  set for strong growth others are not… at least not in the near-future.

Eastern Europe

Take the case of Czech, Hungary, and Poland. Here’s a snapshot of the economic situation in these nations.

Czech. The global recession has hit Czech pretty hard. Declining demand caused industrial output to fall over 12% for the 12-month period ending in June. The Czech National Bank expects GDP to contact 3.8% in 2009 and expand by just 0.7% in 2010.

Hungary. Hungary’s economy was particularly hit hard by the global financial crisis. Hungary had nearly $30 billion in emergency loans to avoid a default. The Hungarian government expects GDP to contract 6.7% in 2009. Hungary’s economy is forecasted to return to growth only in 2011.

Poland. Poland’s economy has a fair chance of avoiding a recession in 2009. After expanding at 0.8% annual rate in 2009’s first quarter, the Polish economy seems to be floundering. The Polish government is expecting 2009 GDP growth of 0.2%. Growth in 2010 is expected to increase just marginally to 0.5%.

Compare the above picture with China and India. China’s economy is expected to grow 8% in 2009. India’s finance ministry is confident that economic growth in 2009 will exceed 6% even under the worst-case scenario.

Clearly, Eastern Europe is not in the same league as China or India as far as prospects for short-term growth go.

Eastern Europe: Should you Buy, Sell, or Hold?

Now although economic growth is not the only factor that is a determinant of price performance of equities, investors need to take account of the fact that the ability of companies to grow profits in contracting economies is limited.  Cutting  costs only goes so far and revenue growth for many companies in such economies may prove as hard as catching the wind. This in turn will put a limit on how high valuation methodologies can go.

Investors looking for a safe haven in emerging markets just for their growth prospects and ‘immunity’ from the credit crisis are quite likely to be disappointed if they choose Eastern Europe. Given the lack of exciting short-term growth prospects in this region, investors sitting on hard won profits should perhaps consider it prudent to at least partly cash in their chips. As always, seek advice from a qualified financial planner.

Tags: emerging market etf, emerging markets, emerging markets fund, msci emerging markets

This entry was posted on Wednesday, November 25th, 2009 at 10:04 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.