Example Of Diversification

By Roger Nusbaum | September 04, 2008 | 3:05 PM | 1 Comment

There was an article in the FT this morning by Tim Brown from a firm called Jewson & Associates about emerging market GDP growth versus emerging market stock market appreciation.

Toward the end there was a comment, really in passing, that I thought was very constructive. He disclosed that their three favorite emerging markets are Brazil, China and Hungary.

He may be right or he may be wrong but those three are each different types of countries, so the three, when combined together, offer a good shot of proper diversification. Brazil is a resource exporting, surplus country. China is a resource importer but also a surplus country. Hungary is a high yielding deficit country. 

These countries are driven from different catalysts and are at different points in their respective economic cycles. There is a global equity market decline underway and none of these countries is immune. Where diversification can come from that these countries can turn down before or after the US and they can turn up before or after the US. 

The US market peaked in October. Brazil, for example, peaked nine months later. China is down 60% from its high versus just 20% for the US. It seems plausible that after such a big decline for China it could turn up sooner than the US--its economy despite having issues is much healthier than the US. Carry trade destinations like Hungary can be thought of as proxies for risk taking. When the market believes risk taking can be rewarded a country like Hungary has a very good shot of having a meaningful rally.

None of this may help today but when thought of in terms of the entire stock market cycle it does help, a lot.