BRIC - out, CEEMEA - in? Change of guard in emerging markets...

I was happy with my Emerging Markets index fund thinking it had me covered across all emerging markets - well not really :-)

The "traditional" concept of emerging markets being primarily the BRIC countries (Brazil, India,China) has now taken another turn. Probably because these countries have started looking a little frothy with billions of dollars of foreign investment in the last 5 years or so. They've got to take a breather sometime - right?

Well, now you dont need to restrict yourself to only the traditional emerging markets. The new (well atleast for me) buzz around is CEEMEA - meaning Easter Europe, Middle East and Africa.

If you want to be early to the party of the next decade (who knows - it might be), consider investing in these countries. Of course it is a given that these are highly risky investments (ever been to Nigeria?), but with great upside potential as well.

Wanna roll the dice on this with some play money?

Check out TRowe Price's new Middle East Africa fund - TRAMX. It opened up in September this year and it has already returned over 11% (in a month!). Of course it may go the other way next month and correct by as much as 50%, but we're talking a small portion of one's assets here - not one's retirement savings.

This fund stays out of the murkier areas in Africa - has quite a few holdings in South Africa and taps into countries like Bahrain, Qatar, Oman etc. The expense ratio is quite reasonable given the exotic fare in which the fund invests.

Another plus I believe is that since this fund is brand new, it does not suffer from asset bloat and the manager has a lot of freedom to really "light it up" :-)

I'm thinking of giving it a shot.......

What's on your Christmas list this year?

Well, if I were to overweight a couple of sectors in my long term portfolio going forward, I would vote for buying into Emerging markets and Energy.

Sounds like performance chasing doesnt it? Might be. Emerging Markets and Energy have been on a tear lately - check out the best performing funds over the last couple of years - you'll see most of them fall into 2 categories - emerging markets and Energy :-).

So why am I putting my money (atleast some of it) on these two in particular?

It looks like over the past few years, the rest of the world is catching up with the US and other developed countries. We are in the process of seeing the often mentioned "Global Economy" really take shape.

In this new global economy, everybody's got a shot. Its not only the big boys that can have all the fun (read the US and other developed nations). Latin America, India, China, Eastern Europe and even Africa have joined in the party and are showing real signs of development and progress ("Real" companies making "real" profits).

IMO, over the long run, Emerging markets have a lot more room to grow and when the next opportunity presents itself, I will be adding to my EM holdings.

As far as oil goes - the falling dollar, a Republican government in the White House (at least until the next election), geopolitical tension in the middle east thats here to stay, increasing global demand, are some of the reasons oil prices will continue their upward trend over the long term.

So the next time oil prices dive a bit, I'm going to get me an energy fund :-)

Ofcourse, these "recommendations" come with the standard disclaimer - be ready for a lot of short term volatility and do not put all your investable assets into oil and emerging markets :-) These should make up only a small part of your portfolio (in my case, not more than 20 percent)

The funds in these categories that I like are

EM

VEIEX - Vanguard Emerging Markets Index (already own this one - will be adding more to it). Its low cost, diversified across the globe and has a great record (more details at Morningstar)

Energy, I am leaning towards

FSENX - Fidelity Select Energy (I dont own it yet but probably will on the next "correction" in oil prices)

Hey, for what its worth - the next time you see gas prices rise at the pump, you can find solace in the fact that at least your energy fund is doing well :-)

Commodities anyone?

What asset class does the following?

1) Gives you diversification over and above cash, stocks and bonds
2) Benefits from the falling dollar
3) Benefits from increasing infaltion and rising prices

well you guessed it - commodities. With the dollar on its way down, prices on their way up and global demand for commodities spurred on by red hot growth stories in the emerging markets, desh included, does it make sense to add a touch of commodities to your long term portfolio?

Take a look at the long term returns of the Dow Jones commodity index (^DJC) as compared to the Dow Jones Industrial Index (US stock - ^DJI) and the Vanguard short term bond index (VFSTX). Click on image below to enlarge



Looks like the overall performance of the commodity index falls somewhere in between (that of stocks and bonds). Also, if you look at this chart across shorter timeframes, you can see that commodities have their own cycles of ups and downs and are loosely corelated with the stock and bond cycles, which gives you good diversification.

There are quite a few ETFs and ETNs that track various commodity indices

1) GSG - iShares S&P GSCI Commodity-Indexed
2) DBC - PowerShares DB Commodity Idx Trking Fund
3) DJP - iPath Dow Jones-AIG Commodity Idx TR ETN
4) GSP - iPath S&P GSCI Total Return Index ETN

I'm leaning towards DJP. Its well diversified across all commodities - precious metals, energy, agriculture products you name it and is also tax efficient. Haven't pulled the trigger yet tho.

Comments are always welcome.

Rupee and the Dollar - cat and mouse game?

Not breaking news anymore, but the rupee is at an all-time high with respect to the dollar. So what.....?

# Well for starters, if you work in an software outsourcing company like Wipro, TCS, Infosys to name a few, or hold their stocks you would have felt some pain :-). These guys earn in dollars/euro etc but their costs/wages are in rupees. So if the rupee gets stronger, it eats into their margins.

# If you are thinking of retiring in India you would have seen your net worth take a 10% haircut.
And there's a double whammy - In an ideal scenario, lets say we have country I (India) with Inflation of A% and country U (USA) with inflation of B% and A is much larger than B and growing, then currency of U should appreciate against currency of I to offset the inflation (A-B). But look at the dollar - its going in reverse.

Where the rupee is headed in the future I don't know, but I believe the software lobby is too strong to let the dollar keep sliding. India will lose the "low cost" advantage that started the growth story that is India today. I'm sure the outsourcing bigwigs have had "talks" with the RBI to intervene (read buy forex to stop the dollar slide). Now, what was the compromise number that they agreed upon - 39, 40, 41 - time will tell :-)

So what can you do to hedge against the falling dollar (not only wrt to the Rupee, but other currencies as well)?

1) Invest a part of your portfolio in International Mutual funds. These funds will rise in value when the dollar falls (over and above the appreciation of the underlying equity)
2) Invest in commodities

Recent volatility and Fed dropping rates....what did you do?

Well, the sub-prime mess that hit the US markets (and in-turn global markets) a couple of months ago, causing the Fed to drop rates raises a few questions:

How did you take the downturn - did you buy, sell or do nothing. It was a great opportunity is assess one's investments as far as risk goes. If you sold in panic, you have way too much equity exposure.

Personally, my portfolio was low on Emerging markets and I took the opportunity to buy into some emerging markets (VEIEX - Vanguard Emerging Markets Index fund).

Overall - if you did nothing that is great too - it means you are on cruise control with your allocations - "stay the course" as they say.

With the Fed lowering rates, I moved some of my cash holdings into fixed deposits (yielding 5.2% APY). IMHO, in the short term, CD rates for "idle" cash will beat Money Market and Online bank rates.....so here's the tip for the day - lock in those CD rates while you can :-)