Developed World v emerging Markets - Time to Review which Is the Riskiest

ringledman

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There have been a number of discussions on here regarding asset allocation and in particular which countries to invest in.

It is still perceived within the western world that emerging markets are high risk and that the so called developed world is low risk.

Because of this conventional advisors and the conventional press will state that an allocation of 10% or so is enough in Asia and Brazil and a risky bet as such.

This is in my opinion is totally flawed for the New world in which we are living.

For any Long Term investor out there i.e. (10-20 years+) then you really need to turn the notion of risk on its head.

The developed world has many structural problems that will prevent it from creating real growth for a long time (i.e. a decade at least). Without real growth, asset prices in real terms (not nominal terms) will not increase.

Yes the dow may hit 20,000 or property double in price but if your currency or the currency of the country you have invested in falls fourfold due to inflation then in real terms you are much poorer.

For this reason we need to reassess what is risky.

Risky to me are the Western Markets of US, UK, Ireland, etc. due to overleverage, low growth, high consumption, high debt nations and becoming overly regulated.

Low risk to me are the new markets of China, Brazil, Malaysia, Taiwan, Singapore, India, Vietnam, HK. I would also add the commodity wealth nations of Canada, Norway, Australia to this list. Japan should also be added as a low risk for other reasons which are too lengthy to go into here.

On this basis we as investors need to totally reajust our portfolios. The Eastern markets are not just about growth but also about being less risky!

It is a hard concept to grasp and most of the developed world are too proud to admit that our wealth is falling and others are rising. We also can't see that our countries are becoming more regulated by appaling government intervention whilst these newer countries are becoming less regulated and more open.

I would recommend anyone here to view these 2 videos by Peter Schiff. 2 Hours of excellent independent advise -

http://www.youtube.com/watch?v=tU8jCa_dKTM
http://www.youtube.com/watch?v=6G3Qefbt0n4&feature=PlayList&p=10E5668909719CBA&index=0&playnext=1

The guy is a legend and everything he says is correct about how to readjust one's portfolio in order to avoid the problems the Western world will encounter over the next decade. We are not out of the woods economically yet. We have many structural problems to overcome and history shows that such adjustments take decades to fix.

Allocate your capital to the lower risk places in my opinion.
 
It is a hard concept to grasp and most of the developed world are too proud to admit that our wealth is falling and others are rising. We also can't see that our countries are becoming more regulated by appaling government intervention whilst these newer countries are becoming less regulated and more open.

I think this is a very key point, and I couldn't agree more with you. The western world tends to falsely believe that we have a free-market capital based economy, while Asian economies, especially China, are being portrayed as communist/socialist planned economies.

While China certainly 'brands' itself as a communist country, the government intervention in its economy is rapidly decreasing. Western countries are now looking at the economic mess we are in, and the first thing that is suggested is that we need more regulations and interventions, when it is exactly the over-regulation and over-intervention that got us here.

If we let the free market take its course then companies would go out of business, new ones would take over, and wouldn't make the same mistakes for fear of bankruptcy!!! No need for regulation as the market would take of punishing failure.

Why substitute a perfecly democratic system, the free market, where everyone has a vote by either buying or not buying consumer goods, with a system where about 40% of a population vote for politicians that then come up with rules for the market. And the rules they come up with are not even representative of the public.

Bottom line is that China/Asia are moving in the right direction, while the developed world is moving in the wrong direction. I for one will be looking at Asia from now on as a safer place for my investments.
 
Chris,

Good to see some likeminded thoughts!

moneyweekasia do some good commentary on Asia if you are interested -

[broken link removed]

UK based analysis but Asian markets are Asian markets!

Asia is the future as far as I can see. Brazil included.

Faber - http://www.youtube.com/watch?v=ubxEJxpBva8
Emerging Market Economies Will Challenge and Surpass the West

As a long term investor (15 years plus) there is only one place to be.

Asia is in a SECULAR uptrend of high Growth and rising wealth. the West has been in a SECULAR downturn since the tech bust in 2000. This has another decade at least to see out. With our current debt levels perhaps 25 years (a la Japan).

The notion of risk has been turned on its head. Growth used to be linked to the amount a country could leverage. The low debt emerging nations were seen as antiquated for having low mortgage LTVs and high savings.

Who's laughing now! The future belongs to the nations that produce goods (aka wealth), have huge savings and reserves, low debt and young demographics.

The great thing is 95% of our Western world still don't buy into it. All the better for Asian investors.
 
To me, the emerging economies present unknown opportunity and unknown risk! I've started working within the last year and I have invested part of my savings in the Chinese market. It is a volatile market but I am there for the long term, and it is allowing me to learn a few early lessons without taking too much risk.

I like Peter Schiff, and I have been listening to his podcast for a few years now. His view reflects the common sense and honesty of the Austrian approach.

However, I am not fully convinced with one of his final conclusions - that the Chinese population will substitute the consumer demand of the US once the US consumer stops buying their exports.

The Chinese population are undergoing a vast improvement in living standards. But will that be enough to replace the debt binging US consumer? China's manufacturing is limited. A lot of their manufacturing is lower end, concentrating largely on non-essential export driven products. Can the Chinese consumer step up and fill this demand? The average wage in China is around US$1,500 per annum. 700 million of the population are rural farmers, many of whom immigrate to the cities of the east coast in search of factory work. While the Chinese consumer may be as sophisticated as any other consumer, the strong saving ethos will likely continue.

Future demographics may further strengthen this saving ethos. The one child policy will lead to a situation in the next 30-40 years where one Chinese working age person may also have to care for parents and grandparents.

India, another emerging economy, is seen as a rising giant in services. However their services industry employs only 0.1% of the population and contributes to GDP by less than 2%.

I'm not a bear of emerging markets, and I do believe their commodity demands in the future will make a lot of shareholders rich! But it is important to consider the negative factors also.
 
You don't have to invest in 'consumer' type companies if you don't think the Chinese can fullfill the demand. There are many commodity based emerging market sector's to be a part of.

The world is going from 6Billion to 9Billion people over the next 30 years. Someone tell me how this will not make many sectors of the emerging markets boom.

The US market based upon 70% consumer based GDP is over. There will be a huge readjustment to living standards in the West that will take decades to see out.

I am placing my money where it has the best chance of increasing. Volatile yes but if you 'euro cost average' and buy every month then volatility shouldn't worry a long term investor.
 
I have had a huge sum of money invested in China and India since the end of March.

I am glad i did.

http://finance.yahoo.com/q/bc?s=^BSESN&t=1y&l=on&z=m&q=l&c=

http://finance.yahoo.com/q/bc?s=^HSI&t=1y

Now i can retire happily offshore, while im still in my 40's.

Im finished in China and India now, not because i dont think there is more money to be made, but because safety is my primary concern for my funds now. The money is made. Keeping it is the important thing now.
 
I have had a huge sum of money invested in China and India since the end of March.

I am glad i did.

http://finance.yahoo.com/q/bc?s=^BSESN&t=1y&l=on&z=m&q=l&c=

http://finance.yahoo.com/q/bc?s=^HSI&t=1y

Now i can retire happily offshore, while im still in my 40's.

Im finished in China and India now, not because i dont think there is more money to be made, but because safety is my primary concern for my funds now. The money is made. Keeping it is the important thing now.

Good call!

Yes the markets in India & China have risen hugely and if you need the cash in the next few years I too would take it out. The P/E's for these 2 markets are high.

My strategy is to invest monthly in the emerging markets over time and ignore the large volatility present in these markets.

I prefer Brazil to China & India at present purely on the valuation basis currently.

India however is probably the best long long term market out there. Russia is also extremely cheap at present but also a lot higher risk I feel.

Vietnam will probably also be an amazing 20 year play.

Marc Faber link stating you should be 50% in Asia if a long term investor (first 2 videos). Couldn't agree more-

http://marcfaberblog.blogspot.com/
 
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