What Rookie Investors Should Know About Emerging Markets

Charles Sizemore recently gave his thoughts on emerging markets to AOL’s Daily Finance:

Emerging market investments are known for their volatility, and in less stable regions, local politics can have an out-sized effect on returns.

For example, Brazil is raising its primary fiscal surplus target to 3.4% due to higher than expected revenues. “Yes, Brazil is actually running a surplus: Its government spends less than it takes in through taxes,” says Charles Sizemore, editor of the Sizemore Investment Letter. “Meanwhile, Portugal is having a difficult time balancing the books. The country just announced its biggest budget cuts in 50 years, along with a string of new taxes on capital gains and business profits.”

Although inflation is starting to pop up again in some countries, emerging markets as a whole are enjoying price stability previously only dreamed of, says Sizemore.

What to Watch Out For

Though it’s a warning that applies in developed markets too these days, be wary of political risks. For example, Venezuelan President Hugo Chavez recently announced plans to nationalize the country’s gold industry. These things happen in politically unstable countries, says Sizemore.

Beware of export-focused countries, he cautions. Given that the United States and Europe are weak right now, you don’t want to invest in emerging market companies that primarily export to them. You want companies that sell to a healthy domestic middle class, says Sizemore.

Whether you’re picking individual stocks or investing through a mutual fund, keep track of the sectors you’re investing in. Some sectors, like energy and mining, are driven more by global factors and less by local ones. “For example, if you want to invest in, say, the rise of the Chilean or Peruvian middle-class consumer, you don’t want to load up on copper miners, which make up a large part of both countries’ stock markets,” says Sizemore. “You’re wanting exposure to the new middle class and its spending, not to the volatile price of a particular metal.”

Sizemore is big on emerging market mutual funds and ETFs with a consumer focus. He recommends the Emerging Global Shares Dow Jones Emerging Market Consumer Titans Index Fund ETF ($ECON).  You can also focus on multinational U.S. and global companies that sell goods and services to emerging markets.

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