By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
Yesterday, I came across an article from the Associated Press warning that investors were pulling their money out of emerging markets and putting it in safer regions. The article listed the U.S., Europe and Japan as areas where investors will see higher returns.
Now, I’ve talked extensively about international markets for the Taipan Publishing Group. I’ve traveled to a myriad of places — from frontier countries like Vietnam and Morocco to emerging markets like Poland and the Czech Republic to developed markets like Italy and Singapore.
So I wanted to check to see if this was actually the case — whether or not emerging markets are still viable places to see investment returns.
The Associated Press says:
According to fund tracker EPFR Global, fund managers and other investors yanked $5.45 billion from emerging markets funds in China, India, Brazil and elsewhere in the second week of February and placed it in equity funds of advanced economies — their biggest weekly inflow in more than 30 months.
What’s behind this move is the undeniable fact that developed markets have outperformed some key emerging markets. The Dow is up more than 4%, as is Germany’s DAX. France is up nearly 7% and Japan’s Nikkei is up more than 5% so far this year.
In comparison, you have some major emerging market indexes down… Brazil is down about 4.5% and India is down 10%.
But this isn’t true of all emerging markets. Russia is up 10.5%. China’s up 4%. In other words, money may be flowing back into developed markets, but some international arenas are still pretty hot.
The truth behind this news report is that some investors are focusing on safety and value. There is no denying that companies in the United States and Europe look like good values right now, and the hope of an economic recovery makes developed markets look awfully safe compared to the turmoil in the Middle East and North Africa.
Increased Investment Doesn’t Mean Decreased Risk
Here’s the thing: There’s risk on both sides.
The economic situation is just barely starting to get cleaned up in the U.S., and the debt in some European countries is still a huge issue. Japan — one of the biggest export economies in the developed world — is struggling with an appreciating currency that could confuse exports.
Emerging markets are dealing with increased food and energy prices as grains and oil spike to new highs, and they are dealing with growing inflation, making them less competitive on the global stage. Combine these things with investment capital fleeing to safer havens and you’ve got a risky setup that could keep investors away.
Foreign Direct Investment, FDI, as defined by the International Monetary Fund, “refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor.”
FDI can be a good gauge of how much faith global investors (including other countries themselves) have in a particular country.
“Safe Havens” Are Losing Money
Foreign Direct Investment totals for the first three quarters of 2010 (according to the most recent data from Organization for Economic Cooperation and Development) show a decrease for more than half of all OECD countries as compared to the first three quarters of 2009.
Making up the list of countries that saw FDI drop are 11 of the 27 European Union member states — including Germany and France — and Japan. The U.S. saw FDI climb significantly.
It should be noted that this list includes only 34 member economies — and therefore does not report on emerging market FDI flows.
China reported a banner year for FDI, with investments totaling $105.7 billion.
Here’s the thing… FDI flows to emerging markets made up more than half of all foreign direct investment flows by the end of 2010. This is important, because this is the first time it’s happened since the United Nations Conference on Trade and Development (UNCTAD) started keeping track in 1995.
Before that, most of FDI was flowing into developed economies, like the U.S. and members of the European Union.
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Find a Balance
As a whole, FDI to Europe dropped 21.9% in 2010 year-over-year, Japan saw a massive drop of 83.4%, while developing economies in Latin America climbed 21.1%. Emerging markets in much of Asia — excluding Western Asia and Turkey — saw FDI climb 17.8%.
The UNCTAD report notes, “Developed countries did not return to FDI growth in 2010. UNCTAD’s latest estimates show that FDI flows to this group of economies fell some 7% to $527 billion, despite the robust recovery in some countries.”
The U.S. is in this group.
As I said before, we can’t deny that emerging markets have seen their indexes and stock markets take a hit so far this year. But FDI flows show that faith hasn’t left developing economies. The correction we’ve seen in such international markets could be an opportunity for investors to balance out their portfolio if they’re overly weighted in domestic stocks and funds.
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About the Author
Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.
As Senior Research Director, global correspondent and managing editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
