I started in the investment management business in the late 1980s and was "raised" on a steady diet of asset allocation and buy-and-hold philosophy. Financial advisors were taught to keep a little bit of money in all asset classes, all the time; market and sector timing were discouraged. That was a long time ago and much has changed in investing.
Advisors who followed this model in 2008 and 2009 got crushed, as all but a couple of asset classes -- U.S. Treasuries and gold -- went down. Fortunately, in 2007 we saw the storm coming and moved clients out of the U.S., especially equities, and into what we viewed as safe-haven trades at the time -- U.S. Treasuries and precious metals, especially gold. In our view, not a tremendous amount has changed in the U.S. economy since then. The U.S. debt problem remains unresolved, the "real" unemployment number is terrible, and fiscal policy is not heading in the right direction. Recognizing market psychology had gotten the best of the U.S. and Europe and markets were acting erratic, we resolved to look for other ways to make money for our clients outside of the U.S. and European markets.
For a long time, I have believed that China and other emerging markets would outperform developed economies in "the future." The question for me wasn't if, it was when. Another question was which markets would perform the best. Because of the complexities of global investing, we had to consider the best ways to get exposure to these markets without taking on undo risk. Deciding in 2009 that the "future" was upon us, we began researching the remaining questions. Through our due-diligence process, we uncovered 16 emerging economies that are posed to outperform the developed markets going forward. We nicknamed these countries our "Sweet Sixteen" and began recommending them to our clients. They were Australia, Brazil, China, Columbia, Egypt, Hong Kong, India, Indonesia, Malaysia, Peru, Singapore, South Africa, South Korea, Thailand, Turkey and Vietnam.
As a general rule, nations in our "Sweet 16" have strong natural resources, infrastructure, liquidity (including from foreign direct investments) and are not overly tied to the successes or failures of the U.S. or European economies. We determined the best way to gain holistic exposure is through open-end investment companies, including ETFs, that benchmark to the countries indices. We find this approach is suited to our desire to invest in the economy as a whole, not a specific sector that may be more susceptible to internal or external factors.
What many people don't realize is that emerging markets are up in 2012. For example, while the Dow and S&P 500 fluctuate from barely positive to flat territory, the India MSCI is up over 4%, Thailand is up over 11%, Peru up over 6% and Egypt is up a whopping 26% (Source: MSCI, June 2012). These are some big numbers that don't seem to be getting much attention from investors or the media. Instead, the media focuses on "risk-on/ risk off" behaviors and tries to guess what will happen in Europe. We understand that there is patriotism to U.S. centric investment strategy, but are stunned that educated investors and managers are choosing patriotism and risk and ignoring opportunities to profit from foreign markets that are fundamentally sound and poised for continued growth.
We suppose many advisors are timid about entering the emerging markets after failed investments during the Asian economic crisis. While we recognize the governmental and social risks in emerging markets, in our view the bigger risk today is in the developed economies. It is in European countries such as Greece, Spain and Italy as well as the U.S. where we see the same issues that led to the Asian economic crisis: political uncertainty, lack of financial stability, civil unrest, high debt and deficits, dropping growth rates and unstable currencies. Our research tells us that these problems will keep the U.S. in a secular bear market for at least the next ten years. Meanwhile, our research into emerging markets shows that they will continue to grow and outperform the troubled U.S. during the same time period.
CIVETS: Why You Need To Own Them
CIVETS stands some of the countries in the Sweet 16: Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Since 2007, the S&P CIVETS 60 Index outperformed the S&P 500 by over 20% gaining 11.5% during the same time that the S&P 500 lost just shy of 12%.
Source: Bennett Group Financial Services, June 2012
Case Study - Vietnam
There is a good long-term story taking place in Vietnam. Vietnam is the 40th largest economy in the world, yet in 2011 it attracted more than $10 billion in foreign direct investment, and that number is expected to nearly double in 2012. So far, year to date, the Market Vectors Vietnam index is up over 25% and the economy has all the right ingredients for further growth. There is strong foreign demand and investment, modest inflation, lower volatility, and a pharmaceutical and agricultural business that is booming. Vietnam is also experiencing a cultural revolution; its population is shifting from primarily lower to middle class. As we've seen in other nations, the growth of a strong consumer base is a pre-cursor to further economic expansion.
We are at a key turning point in banking systems around the world. Financial institutions in emerging markets have high liquidity and are solvent. GDP growth in the CIVETS, including Vietnam, will continue to be in the 6 percent to 8 percent range annually to the end of 2013, while China will continue in the 6 percent to 9 percent range. That compares to a U.S. GDP number of about 1 percent.
We believe the future is now for CIVETS, as well as others in the Sweet 16, and expect that some of these economies will soon outgrow developed economies. These nations are rich in things that every investor should value - people, resources and value - and should be a part of every investor's portfolio in 2012 and beyond.
Dawn Bennett is fund manager for the Bennett Group of Funds and has managed money for investors for 27 years. She is founder and CEO of Bennett Group Financial Services and can be reached through www.bennettgroupfinancial.com. For more information on the funds, visit www.bennettfunds.com.