Invest Like a King

October 20, 2009 9:19 am

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

The legendary kingpin of Louisiana, Huey Long is perhaps best known for his slogan “Every man a king”. A king has control over his resources and dominion. With over 750 ETFs covering just about every asset class imaginable now at your fingertips, your investment options and global reach have been dramatically expanded. In short, you can now invest like a king, rather than being a pawn.

ETFs now cover just about every area imaginable including currencies, commodities, precious metals and hedge ETFs that move opposite markets. One aspect of investing like a king is to pick your own countries and sectors using ETFs. I use country-specific ETFs as the core of my strategy complemented by global sector ETFs - perhaps the real wave of future global investing. Developed country ETFs are a hybrid being to a degree sector plays or broader plays on global growth rather than following the domestic economy and stock market. The German iShares ETF (EWG) is a good example; is global giant Siemen’s stock price tied more to the German economy or to the American or Chinese economy?

Nevertheless, country ETFs are a great way to organize a global portfolio and for challenging broad conventional indexes like EEM and EFA which weight countries based on their market capitalization rather than future growth potential. As e.e. cummings aptly put it: “my only permanent address is tomorrow.”

Let’s take a brief look at look at Singapore, Australia and then emerging markets to illustrate this strategy.

Singapore (EWS) is a high quality, geographically well placed market at the center of the Asian growth story. It is a smart way to play what for now is a sharp recovery in share prices and economic activity. Singapore’s economy surged for a second straight quarter, and the government boosted its 2009 growth forecast, as manufacturing cemented the city-state’s emergence from recession.

Gross domestic product grew an annualized, seasonally adjusted 14.9 percent in the third quarter, following a jump of 22 percent the previous quarter according to the Trade and Industry Ministry.

The economy also expanded from a year earlier for the first time since the third quarter of 2008, the ministry said. GDP was up 0.8 percent from the July-September quarter of 2008.

“A clear but modest recovery is under way globally, at least for the next three or four quarters,” the ministry said. “However, economic activity will probably remain below pre-crisis levels because of the drag on demand in the developed economies.”

The government boosted its 2009 GDP forecast to a contraction of between 2 percent and 2.5 percent from a previous expectation of a fall between 4 percent and 6 percent.

Another attraction of Singapore is its balanced economy with trade, finance and tourism fueling one of Asia’s highest living standards. Manufacturing soared an annualized, seasonally adjusted 35 percent in the third quarter while services grew 9.5 percent. The growth in the second and third quarters is the most of any six-month period since the government began releasing quarterly GDP figures in 1975, said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore.

Australia (EWA) is another country that has weathered the global financial crisis much better than most. Until late last year, Australia had not seen a quarter of negative GDP growth since 1990. The lucky country was achieving GDP growth of 2.5% to 4% before the crisis, and the recent quarterly annualized GDP growth rates of –0.7%, 0.4%, and 0.6% growth (Q408, Q109, and Q209) and an unemployment rate at 5.8% were still a creditable performance for a developed economy.

Australia is at the sweet spot of China growth and the mood down under is extraordinarily upbeat.

And don’t neglect the opportunity to move up the risk/reward spectrum to take a good look at emerging markets. The companies in emerging market country ETFs such as Thailand (THD) are more closely tied to its domestic economy and offer more of a pure play on local markets. The MSCI Emerging Markets Index reached 946.3 last Friday, the highest level since August 29, 2008. On a year-to-date basis, the emerging market index is up by 67%, and from the early March low almost 100%.

Emerging market investing is not a fringe area where you can just put 5% of your portfolio in an index fund and go asleep. It is not just about trying to capture economic growth rates three times larger than in America and Europe or seeking stronger currencies, more fiscal discipline and investing in a rising middle class.

It is bigger than that.

The world is filling in right before our eyes. Sharp improvements in technology and communications coupled with economic market reforms are allowing emerging market countries to close the income gap with the West and this will continue for some time. Emerging markets now account for half of global economic growth and 33% of world GDP.

Emerging markets need to be at the core of your global strategy because they can make you wealthy if you properly manage the risk and volatility.

Consider these facts. In 1990, mainland China’s GDP was roughly equal to that of Taiwan (EWT) - now it is ten times bigger. Despite all the progress India (INP) has made to date, its per capita GDP is still only about $1,000 with plenty of room to grow.

Brazil is now has a GDP approaching $2 trillion dollars, ranking tenth in the world, and just this month was upgraded to investment grade status. Turkey’s (EWT) economy is now the 16th largest in the world - just behind South Korea (EWY). Indonesia (IF), the third largest democracy in the world, is up 109% so far in 2009.

Another sign that emerging markets (EEM) may have a way to run is that the average pension fund only allocates an estimated 5 per cent of its portfolio to emerging markets, yet they make up 30 per cent of the world’s GDP, according to the International Monetary Fund.

Mike Gomez, co-head of emerging markets portfolio management at Pimco, says: ”Without question this is an asset class that continues to expand and is structurally under invested by the majority of longer term investors. This is an asset class that has gone from exotic to more mainstream over the past 10 years.”

Emerging market funds under management globally have increased to a current $563bn from $64bn at the start of 1999, according to EPFR Global, the data provider. Yet, they are still small part of the investable universe compared with the $4,400bn under management in the developed world.

Take control of your global portfolio by picking countries like a king.

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