Tuesday, January 4, 2011

Predictions for 2011 by Richard Kang

These predictions come from Richard Kang, chief investment officer and director of research at Emerging Global Shares, an ETF company focused on the emerging markets.

• Investors will continue to demonstrate extreme fund flows (in and out) of any and all emerging markets assets (equities, commodities, bonds, etc.)

• Because of the liquidity needed for the point above, a disproportionate amount of assets will continue to flow into the instrument of choice: emerging market-focused ETFs.

• Liquidity into emerging market securities will be dictated by macroeconomic events that will cause investors to focus more on the bigger picture rather than individual stocks. Such things might include a big shift in the GDP growth in one country versus another; or significant monetary policy changes; or geo-political events such as war.

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• China will try to bring an economic solution to North Korea to solve the overall political/military crisis on the peninsula. Since China has a problem with inflation, by moving some jobs and manufacturing to North Korea, they can access low-cost labor, given that labor costs represent a big factor in inflation. This would be only a small part of solving a larger problem. However, North Korea only listens to China so it’s up to China to find a solution. They can’t afford a war to stifle their economic miracle story.

• Rising commodity prices means China will push harder to access resources in Africa and Brazil. The US and others will try to compete but the Chinese will likely be more willing to bargain with the leaders of these countries.

• The US economy should do slightly better than expected, thus there will be less dependence on the emerging markets' high GDP to pull the globe into a more sustainable recovery. However, the real household consumption story will be from the emerging markets, not the US and certainly not Europe or Japan.

• The emerging markets will not rely only on domestic consumption, but they will continue to focus on infrastructure projects (major national projects and smaller ones at the municipal level). The upcoming Winter Olympics in Russia and Summer Olympics in Brazil (as well as the World Cup soccer tournament there) will all act as catalysts for major national initiatives furthering the infrastructure story.

• The super carry-trade should be strong in 2011. The US dollar has been stronger than first assumed in 2010. If the longer-term story for the dollar is downward, when opportunities arise global currency market participants will borrow dollars and invest in higher-yielding emerging market currencies. The only question is which will they use more: the greenback or the Euro?

• I sense some serious economic crisis in the US. in 2010 is already a record for bank closures. But I’m thinking of something big like a systemic public pension crisis. I don’t know if Meredith Whitney’s comments on the muni bond market is the beginning but there are some serious crises that are just a few steps away.

• We’ve just finished a lost decade in the US - essentially close to zero returns in the US equity market over the past ten years. And it has been no better in Europe. Japan has had two lost decades. I cannot believe that the US will have another lost decade. So much of the S&P 500’s revenue is now dependent on what happens in high growth economies in the developing world. If US corporations continue to focus on global operations, they’ll do well. The only question now is how investors will view the pure play: companies actually based in the emerging markets focusing the vast majority of their operations there as this is the real growth story. This “emerging market equity” asset category will become mainstream: a core asset category for investors. I believe 2011 will personify this despite assumed market volatility. Perhaps with two 50 percent declines in the S&P 500 over the past decade (tech bubble, global financial crisis), investors here are now used to “emerging market volatility”.

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