67 WALL STREET, New York - August 23, 2012 - The Wall Street Transcript has just published its Investing in Emerging Markets Report offering a timely review to serious investors. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Investing in Emerging Markets - Investing in China - Natural Resources - Emerging Middle Class
Companies include: SPDR Gold Shares (GLD), Market Vectors Junior Gold Miners ETF (GDXJ), ETFS Physical Platinum Shares (PPLT) and many others.
In the following excerpt from the Investing in Emerging Markets Report, an experienced fund manager discusses the outlook for investors:
TWST: What are some of the important trends you see right now driving emerging market investing, and where do you see the largest opportunities as a result of those trends?
Mr. Brynjolfsson: We obviously have a big picture that I already shared, which forms a backdrop. This forms some of our staffing decisions. But we really specialize in trading our portfolio tactically at a higher frequency based on views that we update and change certainly month to month, but even week to week, or day to day.
Right now, speaking on a month-to-month basis, we still feel that deleveraging and deflation risk is the number one concern on the immediate horizon. That is based upon, not just the obvious sovereign issues that are hitting Europe, but also the bank deleveraging. In other words, the attempt to increase capital ratios at banks globally is affecting the European and the global economies.
Beyond Europe, the U.S. economy is clearly vulnerable, partially because of the relatively large and persistent deficits we've been running, which have not really ignited that cyclical tender or kindling that you might need in order to ignite a recovery. But the fiscal pressures are causing future fiscal stimulus to be curtailed, so they're causing the possibility of spending decreases at the federal level, combined with the possibility of tax increases that tend to be cyclically contractionary - i.e., the fiscal cliff, and a general dysfunction in Washington - it does not bode well.
The situation around the globe from Europe to the U.S., and finally China, fingers on the pulse of the Chinese economy suggest that it slowed down relatively sharply in the second quarter, and that's been reported broadly. Policy makers are aggressively trying to undo the tightening they engineered last year and the prior year to cool down the overheating, but it now seems that they may have erred slightly in terms of overshooting on the downside with inflation in China dropping precipitously in recent months.
So that quick tour around the globe suggests that the immediate risk is disinflation or deflation. The longer-term risk, we know what central bankers have, how they've already responded, and we suspect that their easing and pumping in of liquidity will increase in coming quarters, and that, ultimately, results in a global scenario where there is what we call a "competitive currency devaluation," where all the countries are trying to outcompete one another to devalue their currencies. Obviously, what happens is you don't have any net effect on exchange rates because all exchange rates are bilateral. You can't have them all go down at the same time. But what you can have is a debasement and monetization of currencies. Therefore, initially a kind of rally in risk assets, like equities, but longer-term, a more sustained rally that real assets are most notably in, let's say, precious metals.
TWST: Are there some markets that you believe are better to invest in right now than others?
Mr. Brynjolfsson: Yes. I would point to precious metals and to the precious metal space like platinum. Platinum benefits in two ways. One, being a precious metal similar to gold, it acts as a substitute currency, a currency that doesn't rely on any liabilities backing it, but rather has intrinsic value as a monetary instrument - or in the case of gold coins and the like, even as currency. Platinum in particular is attractive because it's scarcer and more valuable than gold on a number of bases. But currently is trading at a pretty steep discount to gold, so that is quite attractive both outright and versus gold.
We are also trading the euro from the short side, which means that our positions vary between being neutral versus the dollar to being short euro. It's necessary to trade it that way because markets don't go in a straight line, and as both sentiment and efforts by policy makers impact the euro giving it ups and downs within a downward trending range. So trading the euro from the short side obviously has risks due to temporary enthusiasm for recovery plans, then the euro tends to have pretty short, strong downdrafts. So we'd like to be positioned for those.
Fundamentally, we think that there is no real solution to the European problem because it's so endemic in the structure of the setup, and obviously, dismantling the structure has its own problems. But we do think the only light at the end of the tunnel would involve a pretty sharp depreciation of the euro that would lubricate some of the restructuring that needs to occur and impose costs on everybody involved with the euro. But this also will create a slightly better fundamental backdrop for Europe by implicitly cutting the real wages and the real liabilities of European enterprises.
TWST: Should the average investor include emerging markets in their portfolio?
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- Emerging Markets