Emerging Markets

The CFA Institute had a shindig with one of the sessions being about how much emerging market exposure to have and Seeking Alpha

posted a recap

of the session. The basic take was that most investors are not only under-invested but also under-benchmarked--meaning that investors who actually benchmark are looking at the wrong target.

Reading this was a great reminder of why the term emerging market has lost most of its meaning and the utility of the term continues to erode. It would seem unlikely that anyone who is willing to go to at least the country level (so narrower than EFA and VWO) is going to buy only the most volatile of countries. It is unlikely that someone would buy only debt-laden, low-growth stinkers. It is (hopefully) unlikely that someone would only buy commodity based countries. It is (hopefully) unlikely that someone would only buy countries from one region of the world.

In terms of the country by country aspect of constructing a portfolio it would be logical to take in countries with varying attributes such that certain expectations are expressed in the choices but without being so lopsided that some un-analyzable event doesn't destroy the portfolio; otherwise I might have 25% each in Chile and Norway.

The process for selecting countries should probably include understanding what the country has to offer (stuff, cheap labor or something else), its growth prospects, the demographic situation, the economic underpinnings (growth, inflation, debt, unemployment), trends in prosperity along with whether the country is becoming more important in the world economic order.

The next step after figuring what countries to own is the best way to own each country. Some holdings might be a very good proxy for the country and some not. Sorting this out comes from studying potential holdings. There is nothing wrong with buying something that may not be a proxy for the country unless you don't realize this.

As an example on Friday afternoon we bought ABB (ABB) for most clients. We got a lucky entry point as the job-print-lift had retraced to just about flat late in the trading day. ABB is headquartered in Switzerland but has a global footprint. This is our second Swiss company as we have owned Novartis (NVS) for many years. NVS has been a pretty good proxy for the Swiss market except for the financial crisis when iShares Switzerland (EWL) went down a lot more due to its heavy weight (currently 22%) in financials. ABB's chart looks very little like EWL's chart and I don't expect it to look too much like EWL in the future.

Obviously EWL would be a proxy for the country but in terms of figuring the best way in I knew seven or eight years ago when I first bought NVS that my preference was to avoid Swiss financials. I knew there was a good chance it would never matter and most of the time it has not mattered but this was one less trade I had to make during the meltdown.

A related quote from Jim Rogers: Buy where the people are going be rich.

He was talking about farmland in Iowa but I think it pertains to country selection too although I might tweak it to read buy where the people are going have an improved quality of life. People in China are never going to have the GDP per capita that Luxembourg (or do I mean Lichtenstein?) has but the China number is going to work higher despite the 60 million empty apartments (I read an article yesterday that cited that number, sorry for not having the link as I did not know I would use it). Like many countries buying into China requires being very selective, I've said many times I want nothing to do with the banks, real estate companies or parts of China that rely on US consumption.

Finally a little Twitter humor. I've been trying to be a little more active with Twitter lately. Yesterday I saw two different Twitter names that included fee-only in the name and when it ran together as feeonly it looked like it said felony. Oops.

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