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Emerging Markets

Investing in India, China, Saudi Arabia and Eastern Europe

By ERIK JOHNSON

Gas prices are soaring, uncertainty in Iraq persists, and one of the greatest natural disasters in the history of the United States has exacerbated investors' worries. Why, with all of these concerns, are investors seeking out such seemingly risky investments in Brazil, Saudi Arabia, China, India and various Eastern European countries? Perhaps the possibility of huge growth potential and large resulting returns have something to do with it. The Economist reported that emerging market funds have tripled in capital inflow from 2004, with returns this year at 5.6 percent--an extremely high return. These emerging markets include countries once thought to be avoided at all costs when investing--Poland, Saudi Arabia, Argentina, China and India.

For years economists have predicted the emergence of China as a world economic power. India has pushed itself into the forefront of international finance discussion, as well. Both countries are turning these predictions into a reality.

Despite all of their political uncertainties, China and India may provide a long-term option for investors who feel their current investments are flattening or under-performing. Although this idea has been popular of late, it's important to consider some of the challenges with these countries, which are often ignored by investors in the excitement of being involved and profiting from their growth. In addition, opportunities these countries offer are not the same--a potential investor should not be blind to their differences.

To begin with, India's economy is smaller than China's and relies quite a bit on the outsourcing it receives. China, on the other hand, is well-known for the trade surplus it runs with the United States while containing multiple Fortune 500 companies. In addition, China had a second quarter growth of 9.5 percent. India, while still largely agricultural, has a booming real estate market due to its hub as an outsourcing center, as well as sprawling mall and entertainment centers that continue to be built.

However, both of these countries do have a negative commonality--that being the poor infrastructure that remains a concern to investors, along with problems in health care, education and pollution. Labor shortages also still exist. On paper, both countries exhibit real growth and appear to be on a positive track for the future. It cannot be forgotten, however, that risk is present, particularly when the infrastructure of the country is not necessarily as strong as other developed countries, such as the United States and those of the European Union.?

One important factor in evaluating a country's growth potential is the growth of open markets and not simply the creation of a stock market--Iraq is a good example of this. A new stock market where a few shares are traded does not equal a solid investment opportunity.

China and India have both seen the development of derivative markets. Derivative markets include futures and options markets and allow for speculative investing in commodities. Nicholas Ronalds, CFA and vice president of ABN-AMRO's future division, notes the importance of the rise of futures markets in China and what it means for investors who are interested in investing in countries with opportunity for growth along with liquidity.?

In an article Ronalds written with Wang xue Qin for Futures Industry Magazine, they note that China's increased volume in these speculative interests has led to reform that keeps these markets in check and requires companies to be registered within China, thereby maintaining markets that are fair to investors. This is particularly important as China has become a weighty force in the world economy, considering the immense amount of raw materials the nation consumes. The rise of futures markets and the volume and liquidity they provide indicates China is no longer a closed socialist economy, but rather one that encourages investment in other open markets like the United States. In addition, it's quite possible that China offers a longer period of growth in the future, something that's clearly beneficial to potential investors.

Nonetheless, investors should be wary of countries that may be performing well in the short term, but may not have a solid long-term foundation. Saudi Arabia, for example, has outperformed everyone with its stock market, but its market is dominated by oil companies. If for some reason oil does top out in price, Saudi Arabia is much less diversified than other economies.

Investing is always a risk, no matter if it is in a growing, unfamiliar country overseas, or in a large, supposedly reliable company in the United States (such was Enron and United Airlines). Perhaps it's time for investors to open their horizons, not necessarily to seek risk, but to seek opportunity and a share in the inevitable growth of China and India, both in the forefront of international finance. o

Published: October 01, 2005
Issue: November 2005