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April 29, 2015

Emerging Markets: The 'Next 11' and 'Fragile 5'

In a periodic table of emerging market returns, every year seems to produce a new country winner -- and sometimes that nation was a recent loser. 


Using returns calculated in U.S. dollars, India was the winner of 2014, up 29%, followed by the Philippines, up nearly 25%. Last year, the big loser was Russia, down 42%, according to Schwab, using Bloomberg and U.S. Global Investors data. In 2013, it was Argentina's 42% return that topped the list, while Peru fell 30% and Brazil fell 27%. Turkey was the winner in 2012, up a show-stopping 65.6%, while the bottom of the list was Brazil, down 2%. (See table for top-performing countries from 2012 to 2014.) 

Anthony B. Davidow, the Alternative Beta and Asset Allocation Strategist at the Schwab Center for Financial Research, says investors should focus on industry fundamentals:
"Regardless of the way an investor gains access to the emerging markets, it is important to recognize that different factors such as commodity prices, economic development, and political instability can affect each emerging economy differently ...Rather than simply weighting securities based on market value, fundamental strategies weight securities based on economic factors such as sales, cash flows, and dividends plus buybacks. With this thoughtful approach, fundamental strategies have historically delivered distinctive and compelling returns over time."
How to slice and dice emerging countries to the greatest advantage? So much for the BRIC acronym - Brazil, Russia, India and China. Consider the economic growth underlying the "Next 11," a term coined by Goldman Sachs. The group is South Korea, Mexico, Indonesia, Turkey, Nigeria, Vietnam, the Philippines, Iran, Egypt, Pakistan, and Bangladesh. And, adds Davidow, don't forget the fiscal deficits and current account vulnerabilities of the "Fragile Five;" of Brazil, India, Indonesia, Turkey, and South Africa. 

Courtesy Dimitra DeFotis, Baron's Blog via First Enercast Financial (Article Archive Here)

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