Not all emerging markets are the same. Some are commodity based, some export technology or sneakers, some are in their own world and so on.If you want emerging market exposure that goes beyond owning one broad-based ETF or OEF you need to be cognizant of the differences and similarities of the countries you own.
If all you owned in 1997 were SE Asian countries you got hit very hard, relative to the wide spread emerging market pain that went with the Asian contagion. If you only owned current account deficit countries during the risk aversion correction you got hit harder than some other folks.
If all you own now is Brazil and Russia you will get crushed if commodities ever endure a serious correction.
The chart above compares the Turkish market with iShares Malaysia (EWM). Regardless of what you think of either country's investment merit the fact is both countries are driven by different things and have much different economies.
Turkey has big deficits all over the place, Malaysia is one of the surplus countries. Turkey has a lot of inflation and very high (high-teens) short term rates, Malaysia's rates (last I looked) are lower than ours with very little inflation.
If you like Turkey it is because you buy into their potential role in the EU (fraught with open ended questions), their very young and large population, the pipeline and a few other lesser things.
If you like Malaysia it is because they are less volatile than a lot of emerging markets, have a well managed economy, you see continuing export growth and you probably have something positive to say about palm oil.
This chart compares the Malaysian ringgit to the Turkish lira. The point of this chart is to show how well the surplus currency did against the deficit country during last spring's stress test.
That is a huge move. If there is ever a repeat of 1997 the chart might simply flip over?
These two countries appear to me to zig and zag against each other which probably makes for good diversification. Lest anyone add 1+1 and get 11, I don't own either country, I am merely pointing out the potential diversification available within emerging markets.
As a side note if there was an ETF indexed to Turkish sovereign debt I would probably buy a little for a few clients. As far as proportion it would be very small, maybe $3000 in a $200,000 fixed income portfolio. I think it would be a good bet that Turkish bonds won't go to zero even if it were to encounter some big bumps along the way. Just a hint of more stability combined with resolution of the Japan tightening cycle (maybe a year from now?) could give a big carry trade bid under the lira. Just a thought, but no easy way to invest in it.
2 comments:
This post about diversification that lowers volatility reminded me of a helpful new book on ETF's, "ETFs for Dummies", which like many of the investment books in the Dummy series is really pitched to the intermediate-level investor. It has an excellent chapter on diversifying with ETFs having low correlations with ETFs already in the portfolio. The book also sent me to an unusual and very useful site (riskgrades.com). You enter your portfolio holdings and it gives you a measure of risk that it compares to the S&P and Nasdaq, tells you by how much diversification is reducing your volatility and lets you see the effect additions and deletions from the portfolio affect your risk. Anyway, I thought this might be helpful.
Thanks for the "riskgrades.com" tip, Anon. Choosing low risk investments and diversifying my portfolio is like wearing a belt and suspenders.
It feels snug and secure to me. Useful at this time, but at a different time, after a prolonged bear market and the beginning of a new bull trend, well maybe a belt (diversifying) is good enough.
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