November 8, 2010 – It’s Off to the Races With Emerging Markets

Featured Trades: (EMERGING MARKETS), (EWZ), (RSX), (PIN), (FXI)
Brazil iShares ETF
Market Vectors Russia ETF
PowerShares India ETF
iShares FTSE/Xinhua China 25 ETF



1) It’s Off to the Races With Emerging Markets. Ben Bernanke’s unprecedented announcement that he is buying $600 billion in medium dated Treasury securities is tantamount to the government ordering you to pour all of your money into emerging markets. The ‘RISK ON’ switch has been flipped, and the Feds have poured super glue into the mechanism. We could have a moon shot up until the end of the year from here. The only price to pay is rising risk levels.

Jim O’Neil is the fabled analyst who invented the ‘BRIC’ term a decade ago, and  has since been kicked upstairs to the chairman’s seat at Goldman Sachs International (GS) in London. Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them.

As I have been pushing emerging markets since the inception of this letter, this is music to my ears. By 2018 the combined GDP of the BRIC’s, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that requires is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate.

‘BRIC’ almost became the ‘RIC’ when O’Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.

If you believe that the global financial markets are back into risk accumulation mode, as I do, then you probably should top up your Brazil position, as it has lagged in the smaller emerging markets so far this year. Jim Chanos, you may be right about a China crash, but you’re early by a decade!

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