Insight: Excessive Growth in Emerging Markets: The Epicurus Institute

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Insight: Excessive Growth in Emerging Markets

The rapid growth and expansion of the Chinese and Indian markets was assumed by investors around the world as sustainable.

No market can sustain rapid, double-digit growth for an extended period without at the minimum, a correction, if not a collapse.

Investors, brokers and corporate leaders foolishly predicted continued expansion of these economies and became caught up in the buzz words like "emerging markets" and "continued sustainability".

We recall a newscaster with an extensive financial background stating on a news program viewed world-wide that the wealth of Chinese consumers coming into the market would keep double digit growth for decades. We ask... what was he smoking?

The question today is whether to panic and sell off everything or to sit back and ride out this correction. Of course, this is up to the individual investor, but in our professional opinion, panic selling is not productive. The majority of shares will rebound, and particularly, they'll stabilize, as they have after each of the previous corrections of this type.

What makes this correction different?
Very little, except that it was spurred by a foreign market, which after all, does not reflect the economic conditions of the US, Canada or Europe.

The US and European markets are under pressure from increase oil prices, which we've predicted for some time would have a negative, daisy-chain effect on products, services and consumers. That being said, this effect should not be a fundamental cause for a panic sell-off on Wall Street.

What to expect?
A few rough weeks of rapid buying and selling, with wild fluctuations in the markets around the world should be anticipated before the trend settles down to the reality that most markets are economically stable. Government reports will show, as the weeks progress, a stabilization of the economic factors that affect key indices.

The immediate days ahead will be particularly rough for investors and corporate executives worrying about their portfolios and company values. While it may seem calamatous, in truth, this is a valid correction in the market. There is no need for panic selling, but there is need to be particularly cautious about the fear that sets in during such periods.

When Franklin D. Roosevelt said "We have nothing to fear, but fear itself." he was speaking to the investing community, trying to reassure them that panic selling does not accomplish anything but the spread of panic.

The companies you've invested in yesterday will be there tomorrow, and the day after. This correction is unlikely to cause the shut down of any companies, not even the ones trading heavily with China. However, investors are advised to review the policies of the companies they've invested in, along with the company's China and India holdings or investments.

Investors should not pull out of a company with extensive Chinese or Indian investments, but should consider in the longer-term a balanced portfolio of companies doing business domestically as well as internationally, to prevent excessive exposure to international market conditions.

What's Ahead for China?
Well, this is still not a totally free economy or society, a fact often overlooked. It is likely that to protect companies where possible failure could occur the Chinese government may nationalize individual companies to protect trade and employment. This would hurt foreign investors, but it would keep the likelihood of a Chinese recession low. In some ways, this is a very good thing simply because it will prevent the recession from becoming a global recession or depression.

And India?
Fortunately, India was not as affected as China by its rapid expansion. However, investors should be extremely cautious here as well. Indeed, investing offshore should be a very balanced portion of the typical investor's portfolio.

The Dollar
Under pressures from an unpopular war in Iraq, excessive and ineffective government spending, political insecurities in the pre-election phase of the next Presidential elections, the prices of oil and the housing market, the US Dollar took a serious hit today against all other currencies. Forex investors began a rapid sell-off today along with stocks.

We don't believe this is sound either. The next election, no matter which party wins will result in a serious correction of the Iraqi war, reduced Defense spending and the signs of housing stabilization are already being seen. Transportation issues will also be stabilized when a new administration brings greater stability to the prices of oil. We believe the Dollar will stabilize quickly, with the next durable goods report and the next Fed meeting.

Alternative Investments?
Invest locally. Instead of taking a broad, international view with your portfolio, look to smaller companies with a domestic product or service that they can deploy with minimal impact from major inflation factors such as oil prices or foreign trade.

Invest in your own business - consider expanding your own company to deal with a greater domestic audience and build for local, not global trading.

Invest in Silver and Gold
Silver has been an underpriced metal for decades. Currently trading around 14.49 a Troy ounce, silver should be priced closer to $40 or more.

Gold is fairly priced right now, and not subject to the growth potential of silver, but it is a long-term investment. We recommend purchasing ingots rather than futures.

Together, about 10% of your portfolio should be in solid silver and gold.

Should I be Wary?
You bet. Be cautious of high pressure traders and brokers looking to get your money into risky investments or funds with excessive exposure in volatile markets.

Read everything and have an investment advisor you trust, who is not associated with your broker and does not have any relationship with them monitor and review any potential investment. Don't make snap decisions. Conduct serious research before you put your money at risk.

In Closing
The world is not coming to an end. This correction, whether you call it that or not, will work its way out and the markets will stabilize. Relax and be patient.

February 27, 2007 by Economics Division

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