Making Millions in the World’s “Super-Goldilocks” Economies

Investment Ideas:

iShares MSCI Emerging Index Fund (EEM)

SPDR S&P Emerging Markets Small Cap (EWX)
ProShares Ultra MSCI Emerging Markets Index Fund (EET)

I particularly enjoy attending Russian social networking events in London, as I did last week in the bowels of one of the city’s most exclusive clubs. With a bit of luck, you’ll spot a second-tier Russian oligarch or two, clutching a copy of the latest London newspaper that his ill-gotten gains are financing. More importantly, you also invariably are greeted by a pack of smiling, 20-something Slavic beauties, who spend the evening politely stroking the egos and plying the pocketbooks of 60-something Russian “biznismen.” With the average Russian male life expectancy hovering around 63, if you’re a young Russian beauty who gets your timing right, one well-timed big trade, and you’re set for retirement before you hit 30. No more worrying about that pesky monthly IRA contribution.
As I don’t fall into either target demographic, I had a chance to chat with a young Russian Citigroup analyst, who told me that the global investment community was abuzz with talk of the latest Citibank research from his New York colleagues. Already widely cited in the media, it touted the “super-Goldilocks” investment case for emerging markets.
I perked up my ears. The young Citibank analyst’s enthusiasm reminded me of John Kenneth Gailbraith’s warning, that “the financial memory is very short.” After all, it was less than three months ago that the headlines were warning of the dreaded “Hindenburg omen,” and permabear Bob Prechter was making the rounds, predicting a collapse of the Dow to 1,000.
August 2010…

Remarkably, it only took about two months for the Hindenburg omen to be replaced by its bullish counterpart, the “Golden Cross.” I almost could hear the voice of John Kenneth Galbraith whispering to me from the grave.



…October 2010

But I also know that a good, old-fashioned emerging markets boom is one of the quickest ways to make a fortune in financial markets. You just have to make sure you have a chair when the music stops…

“Super-Goldilocks” Economies: Bulls in the China Shop — And Everywhere Else

No doubt, you are used to the relentless onslaught of bullish comments about China. But Citigroup’s report extends the bullishness to emerging markets as a whole, predicting that the MSCI Emerging Markets Index will jump 30% to an all-time high in 2011 of 1,500. That’s 12% higher than its all-time high on October 29, 2007, erasing the last vestiges of the “Great Recession.”

As Citibank put it:

“The weak, but not recessionary, macro situation in developed countries is a ‘super-Goldilocks’ environment… The underlying conditions that have driven markets higher over the past few months remain in place and are likely to do so for several more quarters.”

Citibank also noted that emerging-market stock valuations are “far from bubble territory.” That seems right. According to Bloomberg, the MSCI Emerging Markets Index is valued at 13 times analysts’ 12-month earnings estimates and 2.2 times net assets. That compares with ratios of 14.9 and 2.9, respectively, when it peaked in October 2007. Assuming emerging markets reach Citibank’s predicted level, emerging markets would hit 13 times estimated earnings and 2.8 times book value. That’s hardly an exorbitant valuation.

Importantly, Citibank is not alone in its enthusiasm for emerging markets. Long-time guru, Templeton’s Mark Mobius has said that the emerging markets rally faces no risks any time soon. Goldman Sachs’ Jim O’Neil, who I’ve spoken with about his views on China, long has said that the emerging markets party is set to go on for at least a decade. Former Morgan Stanley chief strategist Barton Biggs is even more optimistic, saying that emerging markets could double from their current levels. Given current valuations and growth prospects in emerging markets, and the prospects of markets overshooting, that forecast is not as crazy as it first may seem.

So what really has changed since the end of the summer? The answer, of course, is quantitative easing. An extra $600 billion sloshing around global financial markets has two effects. First, it devalues the dollar, sending dollar-denominated commodity prices higher. Second, with interest rates forced down, investors are sent on a desperate chase for yield, driving up the prices of all assets in emerging markets. Even permabears like Nouriel Roubini are predicting that the liquidity-driven party in global markets could go on into next year.

“Super-Goldilocks” Economies: How to Profit

With “risk back on” in global economies, the easiest way to make money is to pile into emerging markets through the iShares MSCI Emerging Markets Index (EEM). If you want an extra kick, you can invest in small caps in emerging markets through an exchange-traded fund like SPDR S&P Emerging Markets Small Cap (EWX). If you can endure even more stomach-churning volatility, you can place a double leveraged bet on the whole sector through the ProShares Ultra MSCI Emerging Markets Index Fund (EET).

One thing is for sure. If you want to tap into the boom in emerging markets, act quickly.

All financial markets have their seasons. And after a long winter, it is spring time in emerging markets…

Don’t miss out.

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