The most recent comment had a point that comes up a lot that I wanted to address.
For the people who want to invest in emerging markets, it seems to be that the best way to get into those markets safely is buy investing in large multinational's/foreign companies that do buisness in those regions.
To me that seems like ETF's like PID and KIE are a good way to get involved in these markets. As a set of global natural resources play's the iShare's Canada/Australia, and the ETF IGE, could be a good play on the natural resources that China/India will need in the future.
It seems to me that almost every interview on CNBC about international markets this question comes up. What about buying US companies that do business in emerging markets? The answer on TV always varies.
This discussion is emerging markets, right? A big American industrial or insurance company is not an emerging market company. Part of you fundamental process may be to include a company because it derives revenue from emerging countries.
This chart compares Petrochina (PTR), AIG and the S+P 500 from April 2000 through year end 2002. The action on the chart perfectly captures my point. AIG does a lot of business in emerging markets. Perhaps it was the emerging exposure that allowed AIG to do better than the S+P but it still tracked closer to the S+P than PTR.
I should note that I looked at Caterpillar in this same vane and CAT, which some clients own, had a period of time where it correlated to PTR but then CAT fell away from it very sharply toward the end of the time period.
There are several moving parts here. One is moving away from US dollars in your portfolio, another is riding coat tails of another market even if you pick the wrong stock within that market and yet another is the relatively low correlation that emerging markets have to the US market. To be fair and balanced I should not that some studies show the correlation is closer than it used to be.
From there the issue then becomes how to access emerging markets. The choices are common stock or a fund of some sort. Obviously what you do from there depends on you tolerances and preferences.
4 comments:
I agree, even if the currency issue could be set aside, multinational corporations normally obtain too small a percentage of their revenue from emerging markets to make them a reasonable proxy for those markets. Currency hedging by multinationals to stabilize international transactions may couple their returns to those markets somewhat but I doubt the net effect is significant.
But the topic of currency hedging brings up a point worthy of discussion perhaps? For example, if you buy a mutual fund that also hedges currency are you in fact creating a synthetic US financial instrument and is that really desirable from the standpoint of overall portfolio diversification?
RW
I remember reading somewhere that China's industrial strategy was to emulate such multi-nationals as Japan's Sony, Mitsubitsi(?) etc., and not just keep exporting Wal-mart type stuff, which was viewed as an interim step.
While not today, but from a long-term investment strategy, multi-nationals may be facing challanges they never saw before, and are no longer quick footed enough to respond.
OG
I have also wondered about buying multi-nationals for emergin market exposure. I think your graph is misleading though. COmparing an insurance company to an oil company isn't very helpful. I would rather see a chart of several multi-national insurance companies vs some emerging market ones or multi-national oils vs PTF. Let's look at apples vs apples
The chart is to use PTR as a proxy for China not to compare an oil company and an insurance company.
AIG has very little correltion to the China proxy and more correlation to the US market.
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