Emerging markets have thrived recently, rising around 75 percent in the past year alone. Is this a multi-year mega-trend or a flash in the pan? In the face of Europe’s financial crisis, can emerging markets repeat their past success?
To find out, Research asked Richard C. Kang, chief investment officer and director of research at Emerging Global Advisors (EGA). At the end of April, EGA managed $114 million in six sector and country-focused emerging markets ETFs. Kang shares his insight and views about what lies ahead for this exciting asset class.
Your company recently launched infrastructure ETFs that follow stocks in China (CHXX) and Brazil (BRXX). Tell us more about the infrastructure opportunity.
The key factors underlying the emerging market story as it relates to infrastructure are population, urbanization, economic transition and wealth accumulation.
Any emerging market of the past that has risen to “developed” status has transitioned to one based on resources (mining/oil dependency, agriculture) to one of manufacturing and potentially diverse services. This transition includes an often massive urbanization trend. Government control of this transition is key as some cases have been managed poorly while some with better results. After the KoreanWar, Seoul transformed [from] a city of less than a million to now at well over 10 million or roughly a quarter of the country’s population.
This is a good example of large scale transition. Many cities in Japan and Western Europe are equally valid as examples.
For other cases of urbanization, the result has been poor. Mexico City would be an example. The difference is government planning and their steadfast intent to focus on the longer term objective of progress and modernization. Today, based on the first factor of demographics, we find that the key opportunities are in China, Brazil and India. In these countries, although to varying degrees, we see that their governments are spending (and have already spent) significant monies to fund major infrastructure projects. We know what their airports will look like. We can already see it in Seoul, Hong Kong and Singapore. It’s simply a matter of time.
It’s key for investors to understand that we’re witnessing the greatest move of people out of poverty in the history of this planet. That’s not an exaggeration. It is simply a matter of a high population never seen before in history and the major advances in technology that allow for a modern economy to be built based on certain prerequisites (healthy, educated population; access to commodities and data; good supply of water and food; etc.). But it’s not enough that they’re making money. We also have a pendulum swinging from developed markets to emerging markets. Due to past excess, we in the West are forced in aggregate to save more and spend less. In the developing world, they have the freedom to save less than they have historically, thus allowing for more spending.
Over the past year, gold has underperformed metals and mining stocks (EMT). What’s your view of gold?
Gold has surprised many by its relatively poor performance. Still, it has recently hit roughly $1,210, a rise of over 13 percent since a bottom in early February. This recent high is close to the highs of early December, which on a nominal basis is the major secular high of this recent bull market. The fact is that so many investors focus on gold’s role as a quasi-currency, an inflation hedge or other financial role.
As with any commodity, the forces of supply and demand rule. This means that Indian demand during their traditional wedding season matters. It also means the surging industrial demand from emerging markets that has slowed along with the rest of the world post-crisis also matters.