Friday, April 07, 2006

Investing in Emerging Market Funds

Warren Buffett, arguably the worlds greatest investor, had this to say about investing in foreign stocks in his annual letter to share holders.

We reduced our direct position in currencies somewhat during 2005. We partially offset this
change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring nondollar exposure. That’s largely because of changes in interest rates: As U.S. rates have risen relative to those of the rest of the world, holding most foreign currencies now involves a significant negative “carry.” The carry aspect of our direct currency position indeed cost us money in 2005 and is likely to do so again in 2006. In contrast, the ownership of foreign equities is likely, over time, to create a positive carry – perhaps a significant one.

Yahoo! carried a news article talking about the BRIC countries and emerging markets. The article correctly said the returns from emerging markets averaged 12% in the first quarter of this year. Of the emerging markets, the returns from Brazil were up 20.2%, returns from Russia 28.3%, returns from India 21.1% and returns from China 21.4% respectively. In the previous article, we discussed the pros and cons of investing in India. We also looked at some of the mutual funds that provide investment options for U.S based investors in India.

In this article, we will look at the economies of the BRIC countries and look at some of the ETFs and mutual funds specializing in the BRIC countries.

Brazil has a land area roughly equalling that of the U.S and a population of about 190 million people. Brazil is replacing the U.S as the worlds agricultural power house. Brazil has a population of 190 million with the median age in the mid twenties. The size of Brazil's economy is about 870 billion dollars at current exchange rates. The economy grew at the rate of 4.9% in 2004 and 3.3% in 2005. It is expected to increase to 3.5% in 2006. The economy is powered by surging exports particularly to the asian countries. Brazil has a trade balance of about 40 billion dollars with the U.S and runs a surplus of about nine billion dollars.

Russia is worlds largest country by land area with a population of 143 million people. GDP is around 750 billion dollars by 2005 expectations. The economy is growing at a fast pace because of the surging energy exports. The Russian economy is expected to grow by 6.1% in 2006 if the oil prices stay in the $60 level. The economy grew at 6.5% rate in 2005. Russia has about 20 billion dollar trade with U.S and runs a surplus of about 11 billion dollars.

Indian economy expanded at 7.6% rate in 2005. The economy is expected to grow at 8.1% rate in 2006 and sustain this momentum for the next couple of years into 2008. India is worlds seventh largest country by land area and is the second most populous country. We looked at some of the pros and cons of investing in India in the previous article. The size of the Indian economy is about 800 billion dollars and the growth rate is expected to ratchet upwards steadily. India's trade with U.S is about 27 billion dollars and India runs a trade surplus of about ten billion dollars. The trade is expected to be bigger in size in 2006 and along with it the trade surplus.

China is the worlds most populous country and is almost the same size as the U.S. in size. The Chinese economy is expected to grow at the rate of 8% - 9% through 2010. The size of the Chinese economy is about 2 trillion dollars and is likely to continue to grow at a fast pace through 2015. China's trade with the U.S totaled 285 billion dollars in 2005 with exports outpacing the imports by 201 billion dollars. The trade is expected to be much larger in 2006 with a larger surplus with the U.S.

Given this, let us take a look at the United States economy. The U.S economy is expected to grow at 3.5% in 2006 and the growth is expected to slow down to 3.3% in 2007. The growth is expected to slow down but continue to grow till 2009. The current GDP is at 12.5 trillion dollars at the end of 2005. The economy is expected to grow to 14 - 14.5 trillion by 2009.

In the prior article, we looked at investing in India. MSNBC ran an article of mutual funds and investment options in the China region. We will look into the Chinese market in more detail in the upcoming articles. The ETFs in the Chinese market are FXI and EWH respectively. ML also wrote an article comparing the Japanese and Chinese economies and the prospects in them. Some of the other mutual funds specializing in China are:

GCHAX - AllianceBernstein Great China Fund
NGCAX - Columbia Newport Greater China Fund
EVCGX - Eaton Vance Greater China Growth Fund
FHKCX - Fidelity China Region Fund
GOPAX - Gartmore China Opportunities Fund
ICHKX - Guinnes Atkinson China & Hongkong Fund
MCHFX - Matthews China Fund
TCWAX - Templeton China World Fund

The ETFs and mutual funds specializing in Russia are as follows. After our China series, we will take a look at investment options in Russia. Some of the mutual funds specializing in Russia are:

TRF Templeton Russia and East European Fund Inc
CEE The Central Europe and Russia Fund Inc
LETRX ING Funds Russia Fund
XTRFX Templeton Russia and East European Fund Inc
XCEEX The Central Europe and Russia Fund Inc
TMRFX World Funds Inc Third Millennium Russia Fund

The Brazilian ETFs and mutual funds are as follows:

EWZ iShares Inc MSCI Brazil Free Index Fund
BZF Brazil Fund Inc.
BZL Brazilian Equity Fund Inc.
XBZFX Brazil Fund Inc.
XBZLX Brazilian Equity Fund Inc .

Let us also take a look at the generic ETFs EEM and VWO that invest in emerging markets. Let us see how they stack up when it comes to the BRIC countries.

First EEM, EEM has about 21.72% of its assets in the BRI countries with zero percent invested directly in China. However, EEM invests about 36.1% in Korea, Hongkong and Taiwan. All these countries have large investments in China and I would add this up to EEM's share in the China market. EEM has 55.8% invested in BRIC and peripheral countries.

Let us look at VWO next. VWO has 14.4% in Brazil and India with zero percent in China and Russia. VWO invests in 42.22% in Korea, Hongkong and Taiwan. Overall, 56.6% is invested in BRIC and BRIC peripheral countries.

Does this make one fund better than the other? Probably not. We will examine China, Russia and Brazil and the ETFs/Funds in these specialized markets in the next few weeks in more detail.

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