You Will Lose Your Shirt, Pants and Underwear with Emerging Markets Here

Contrary to what pundits are saying on CNBC, this is not the time to be investing in emerging markets.

I watch CNBC and read the Wall Street Journal and the Financial Times regularly, and am always a little surprised by the flavor of the month.

This month, the mantra from the so-called experts is something like this: \"The US market is clearly going to be affected by a housing decline so we are very cautious with our US investments. We prefer stocks with international exposure, particularly exposure to emerging markets. The world economy is in a global boom and you need to play it by getting into investments in places like Brazil, Russia, India and China.\"

I am certain that most of these analysts have never been to these countries or some of the smaller markets that they are pushing these days (like Argentina, Eastern Europe, Vietnam, Singapore, etc.). They are just looking for alternatives to US investments because of the feared recession, but they are very mistaken and giving very dangerous advice. They should see these markets and understand them before they start telling others to invest.

I've lived outside the US for half of my life, including in emerging markets. I've invested in emerging markets for a long time. I've made fortunes on paper and lost fortunes in these markets. I've learned my lesson and let me tell you why I am avoiding all emerging market investments:

1) Even the most stable emerging markets are by their nature cyclical. We are closer to the end of a growth cycle than the beginning. Ends of these cycles are not like the ends of US cycles. The busts are bloody and ugly and more ugly.

2) When growth cycles end, corruption gets more rampant and emerging markets (particularly places like Russia and China) lack a law-based state that protects investors or any securities laws.

3) The so-called housing crisis in the US isn't a housing crisis, it is a credit crisis and it is going to prove to be worldwide. Banks have lent money the last four years not just to the marginal homeowner in the US, but they have lent money to the marginal farmer in Argentina, the marginal factory in China, etc. Lots of these loans will need to be restructured and some will prove to have been so aggressive that they will result in defaults.

4) It is a global economy. A US slowing or a European slowing will result in a slowing in emerging markets. Emerging market growth is driven by demand from developed markets for everything that they are producing (including commodities) and capital flows from developed markets. Emerging markets have never continued to grow in a time when mature markets are slowing.

5) The dollar is at the end of a sharp declining cycle. Investments in all non-US denominated concerns are likely to decline in US dollar terms based on a dollar appreciation against many emerging market currencies and established currencies over the next several years.

If you insist on emerging markets, buy US companies with emerging market exposure here. Buy the Cokes, buy the Intels and Microsofts. You are never going to make the kind of money that you might make if you time the perfect emerging market investment right. But, this is the wrong time in the cycle; it is only the right time for losing your shirt, pants, shoes and underwear.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • Jay Buell

    August 25, 2007

    I trust that you are not related to Jimmy Rogers (you have a different spelling), but I found his commentary on emerging markets to be very similar. He obviously knows these markets well and has suggested that the entire global bull has run its course.

  • Henry Rainer

    August 25, 2007

    I disagree. Emerging markets are growing quickly and will continue this growth into the foreseable future. There will be hiccups and investors must have a strong stomach, but the gains in places like China and India are just beginning.

  • Peter Than

    August 31, 2007

    Each market will have a different experience and they shouldn't all be tied together. China and India are massive labor markets, whereas Brazil and Russia are commodity-based economies.

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