ETFs

Why Investing Abroad Makes Sense

As the U.S. economy continues to struggle, consumer spending remains weak, consumer confidence remains fragile and the labor markets try to get a boost, investing abroad makes sense and for good reason.

Most recently, the Institute for Supply Management released an index of non-manufacturing U.S. businesses that indicated the U.S. service industry is in contraction mode, which has been primarily been driven by concerns that weak employment numbers and fears over job security and stability have consumers worried which will curtail consumer spending and eventually hurt revenues.  This notion has been furthered supported by earning reports released by retail giants Saks Inc. (SKS) and Macy’s Inc. (M), which both missed analyst expectations and failed to get the Black Friday boost that was expected.

On the positive side, many economists expect the U.S. economy to stabilize and actually show signs of growth in 2010. In fact, U.S. GDP is expected to expand by 2.6% in 2010, but this is a far cry from the growth rates of 7% and higher expected in many emerging Asian and Latin American nations.

In addition to an attractive GDP growth rate, other favorable characteristics of these emerging economies include growth in labor forces, increases in technology which have helped improve efficiency, growth in industrial production and the emergence of trade agreements. 

Lastly, these economies are favorable due to the fact that their financial systems were not bogged down by the global meltdown and stuck to stable growth strategies as opposed to dabbling in derivative strategies that banks in the developed world did.   These financial systems were also able to keep some of their strength due to strict banking regulations imposed by their governments, high deposit to loan ratios and strong capital adequacy ratios. 

Some equities to watch include:

  • the iShares MSCI Emerging Markets (EEM), which is a good diverse way to gain exposure to China, South Korea, Brazil and Taiwan.  EEM has more than doubled from its March low of $19.94 to close at $41.46 on Thursday.
  • the iShares S&P Latin America (ILF), which gives exposure to Brazil, Chile and Mexico.  ILF is up 127 % from its March low of $21.64 to close at $49.06 on Thursday.
  • SPDR S&P Emerging Asia Pacific (GMF), which gives exposure to China, Taiwan, India and Malaysia.  GMF is up 106% from its March low of $35.77 to close at $73.54 on Thursday.

Although emerging markets are expected to keep their strength through 2010, they come with inherent risks and volatility and a god way to mitigate these is through an exit strategy.  According to the latest data from www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: EEM at $39.10; ILF at $46.52; GMF at $70.39.  These price points change on a daily basis to reflect market conditions and updated data can be found at www.SmartStops.net.

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