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Ukraine uncertainty won’t derail emerging market gains: Baker

Pras Subramanian

A president on the lam and an angry Russian bear looking to assert his authority on a wayward former territory. Although the situation gets murkier in Ukraine, the prospects of contagion coming from the former Soviet state seem minimal, judging by global market reaction. The question for investors is why the Ukraine situation differs from Greece’s insolvency, or on a smaller scale, Cyprus’s banking failure, when European markets roiled from the daily drip of bad news coming from these two small countries.

As an investor in emerging markets (EEM), Simon Baker of Baker Ave Asset Management has been keeping an eye on the situation. “Cleary in the short run there are a lot of problems [in Ukraine],” he says in the attached video, as indicated by the fact that the Russians won’t provide much-needed financing for Ukraine, and that we’ve seen “rising bond yields, the currency is selling off, so the in the short term there is concern. “

But there is a difference between what’s happening now in Ukraine, and the Greek and Cyprus situations. “Emerging markets all aren’t created equally. There’s a little bit of a squabble going on but I don’t think it will derail what’s happening in Europe.”

According to Baker, certain emerging markets represent a way to profit from overhyped fear in the emerging markets overall. “I think they’re a play on hope,” he says. “Initially people were concerned when we started tapering, we expected interest rates to go higher, currencies to really struggle, but we’ve actually seen the 10-year (^TNX) come down,” among other unexpected results. Baker says investors are looking at emerging markets and asking, “where do I want to be?”

Baker’s looking at a couple countries in particular in the EM space. In addition to having a piece in China (FXI), Baker says “we like Mexico (EWW)… the economy’s opening up, the political stability is getting better…it’s a better way to play the emerging markets.” In terms of allocation, Baker suggests putting 7-10% of your portfolio into the “oversold” EM sector.

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