Analysis: Emerging market investors find some places to hide

Sun Jan 26, 2014 1:12pm EST
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By David Randall and Ashley Lau

NEW YORK (Reuters) - After a scary sell-off in emerging markets in the past week, investors who specialize in the sector are looking for places to hide while also looking for opportunities to benefit.

And that means finding countries that have stronger economic underpinnings and political stability, while abandoning or betting against those whose current account balances and government budgets are deeply in the red and where there is political turmoil.

The declines have been triggered by signs of weakness in the Chinese economy, including fears it may eventually face a debt crisis, and concerns about how much hot money may exit some markets as the U.S. Federal Reserve pulls back from its bond-buying program. The stimulus that program has given the world economy in the past few years is widely credited with big gains in stocks and other asset prices.

The benchmark MSCI Emerging Market Index .MSCIEF dropped nearly 4 percent over the last five trading days, and after Wall Street's dramatic selloff on Friday it is expected to fall further on Monday. Investors have pulled money out of emerging markets stocks funds in six of the last seven weeks, including a $422 million retreat in the week ended January 22, according to Lipper, a Thomson Reuters company. The losses are exacerbated by plunges in currencies.

Among the strategies being pursued to limit losses or take advantage of the weakness are buying ETFs that have short exposure to Brazil and other Latin American countries, buying funds that invest in mid-cap companies seen as less tied to global turmoil, and investing more in exporters in countries like South Korea and Mexico. These are countries seen having better prospects among emerging markets and the exporters earn revenue in dollars, reducing their exposure to volatility in local currencies.

"This is the time to look at countries and regions that have advantages over others," said Clem Miller, investment strategist with Wilmington Trust Investment Advisors.


Scott Kubie, chief investment strategist at Omaha, Nebraska-based CLS Investments LLC, said he would look to short ETFs exposed to Brazil, pointing to the iShares MSCI Brazil Capped ETF EWZ.P, which fell 2.4 percent on Friday and has lost about 10.1 percent year-to-date. The ETF tracks the MSCI Brazil Index, which tracks the large and mid-cap segments of the market.   Continued...

Turkish lira banknotes are seen in this photo illustration taken in Istanbul January 7, 2014. REUTERS/Murad Sezer