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Emerging Markets
The Smart Profits Report: Issue #455
Wednesday, September 12, 2007
Emerging Markets: Four Ways To Cash In On The “Made In China” Debacle
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
When you’re in a confined space with lots of other people, it’s sometimes hard not to overhear conversations. And on those long, boring flights, you can really learn something much more valuable that watching the latest Ben Affleck movie.
For example, while on a recent flight, I overheard two executives complaining about doing business in China. What they said was very revealing - and if it’s part of a larger trend, it could open up some other investment opportunities in some very unlikely emerging markets…
“Made In China”… Lead Paint Anyone?
By now, you’ve probably heard all about the recent product recalls of items “Made In China.” Toys and toothpaste are the main bad eggs. And the company hit the hardest is toymaker Mattel. The firm has endured a miserable summer so far, with three recalls - and counting.
On August 1, its Fisher-Price division recalled 1.5 million items, due to dangerous amounts of lead paint. Beloved characters like Big Bird and Elmo were among those tainted. Just two weeks later, Mattel recalled a massive 18 million items worldwide. Again, the Chinese slapped on too much lead paint, as well as flimsy magnets that kids could accidentally swallow.
And last week, Mattel’s Fisher-Price guys issued yet another recall - this time, 844,000 toys that included Barbie sets and two other toys. The reason? You got it… lead paint. And the executives I overheard on the plane painted (pun intended) a grim picture…
Losing Faith In The “Made In China” Labels
One executive mentioned that he’d completely halted the production of his household name beauty product because he no longer had faith that it was safe. Furthermore, he felt that the American consumer would also question the safety of his products. Hardly surprising, given the high-profile Mattel recalls this summer. So even if he felt assured that his product was contaminant-free, he thought sales would suffer as a result of the stigma now attached to the “Made in China” label.
The other guy shared the same view, saying that he’s frustrated with his Chinese manufacturing partners, because the factory’s management often told him what he wanted to hear in order to avoid a confrontation. He was considering pulling up stakes as well.
Clearly, it’s not good practice for Chinese manufacturers to be less than forthcoming with their foreign business associates - but according to the conversation I heard, it’s pretty prevalent and is causing problems for many businesspeople around the globe.
Tainted toys… poisoned pet food… contaminated toothpaste… faulty tires… and more. Consumers and managements alike recalling and reconsidering products made in China. The country’s manufacturing image taking a beating. But is there a way to profit from this? The answer is yes…
Cashing In On The China Fallout… A Trio Of Emerging Markets
Many emerging markets are performing strongly, and even a small China fallout could light a fire under their economies. Okay, before I go any further, don’t get me wrong here… China’s enormous manufacturing machine is not going to suddenly grind to a halt. Don’t forget, China produces over 80% of all toys sold worldwide - and can do so at a very low cost, with dramatically lower labor costs than the equivalent job in America.
But there’s no doubt that companies and consumers are increasingly nervous about Chinese-made goods - right before the crucial holiday season, too. And even if just a small fraction of businesses move their operations to other smaller developing nations, it could be enough to move the needle in those countries. Here are a few to keep an eye on:
- Vietnam: Did you know that Vietnam received $10 billion of foreign investment in 2006? It wasn’t just a flash in the pan, either - that number is expected to swell to $16 billion this year. And the Ho Chi Minh Stock Index is reaping the rewards - it has jumped 81% over the past year.
- Bangladesh: Despite its military rule, Bangladesh’s GDP is forecast to grow 6.4% this year, following 6.5% growth last year. Thanks to growing investor confidence and a rash of new IPOs, its stock market is expected to double in size over the next 12 months. Over the past six months alone, the number of people opening brokerage accounts jumped by roughly one-third. The Dhaka Stock Exchange Index is up 61% over the past year.
- Sri Lanka: Another country experiencing political instability - but it’s certainly not affecting its economy. GDP growth is still expected to grow over 6% in 2007-2008 as foreign direct investment continues to increase. Its stock market is up 14% this year, but has nearly tripled over the past five months.
You can bet that with the Beijing Olympics less than a year away, China is pulling out all the stops to keep its image intact and raise its global profile. But concerns over its massive manufacturing sector are dragging its image down. So keep your eye on these other emerging markets that may benefit from the Chinese fallout, as well as their own organic growth. And here’s how you can benefit, too…
Three Ways To Gain Exposure To Emerging Markets
If you portfolio doesn’t already have any exposure to emerging markets, you should strongly consider ETFs or mutual funds. Emerging market investing is an excellent way to diversify and spread your risk within your portfolio. In addition, because emerging markets have more room to grow, when times are good in these countries and markets, your returns could get an extra boost. Keep in mind, though, that by nature, they can be a bit more volatile than the U.S. market.
If you want to dip into emerging markets, there are a couple of simple ways to do so. There are many mutual funds and ETFs that focus on the sector. Here are three to consider:
- Vanguard Emerging Markets ETF (AMEX: VWO): This is based on the MSCI Emerging Markets Index, with the fund investing in the shares of the 840 companies within it. The fund is up 22% in 2007.
- Fidelity Southeast Asia (FSEAX): If you want to head down the mutual fund path, take a look at this one. It boasts a five-star rating on Morningstar, has no load expenses (its category average is 5.3%) and a measly 1.04% expense ratio, compared with the category average of 2.02%. What’s more, it’s been flying this year, sporting a 39% return. The fund invests 80% of its capital in Southeast Asia, including stocks in Hong Kong, South Korea, Thailand and Taiwan.
- Matthews Pacific Tiger (MAPTX): This fund also has no load expenses, low expenses and a solid 46% over the past year and 28% over the past five years.
For an overall emerging markets fund, consider T. Rowe Price Emerging Markets Stock (PRMSX). And if you do opt for a mutual fund investment, be sure to look at the expense ratios and the prospectuses carefully, so that you are getting the most for your money.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- While China does have an increasingly affluent middle class, most of its population is poor and unable to handle such severe increases. And not even four interest rates hikes this year, culminating in a 9-year high of 7.02% last month, have arrested the trend. Speculation is mounting that the government may have to take more decisive action to cool its economy (GDP growth hit 11.9% in the second quarter), as well as the stock market and real estate bubbles.
- Just one week before the Mattel toy recall story broke, Karim Rahemtulla positioned Xcelerated Profits Report readers in the “ultimate contrarian play” on China. As the U.S. credit crisis spilled over into the global markets, the Chinese market slumped - and readers walked away with gains of up to 112% in just five weeks. In the next issue, due out at the end of next week, Karim will reveal his “anti subprime cure” recommendation. To find out more about Karim and the team of professional traders that have notched up other recent gains of 120%, 79%, 65% and 45%, visit this link to continue.
Related Articles:
- Global Markets Investing: Get 300% More Bang For Your Investment Dollar And Diversify Your Portfolio
- Made In China: How To Profit From China’s Tarnished Toys & Outdated Infrastructure
- Exchange Traded Fund Investments: Four Key Advantages Of Exchange-Traded Funds
