Too many financial advisers have been trained to focus on investing in the United States, buy-and-hold strategies, and typical diversification protocols. It is becoming very apparent that these methods, many of which were first expounded by economists more than two decades ago, are losing their effectiveness.
Advisers who adhered to these strategies in 2008 got crushed as investments in European and U.S. markets tumbled, with the exception of U.S. Treasuries and gold. Things have only gotten worse in Europe, the U.S. debt problem remains unresolved, the “real” unemployment number is terrible, and fiscal policy isn't headed in the right direction.
It seems that most investors are merely speculating in Europe and the United States. Quite frankly, advisers need to look for other ways to make money for their clients outside Europe and U.S. markets.
We think that the opportunity lies in emerging markets.
CIVETS stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Since 2007, the S&P CIVETS 60 Index has gained 11.5%, compared with a loss of nearly 12% by the S&P 500.
As they mature, these emerging economies may offer advisers and their clients better investment returns than Europe and the United States over the next five years.
CIVETS have strong natural resources, infrastructure, liquidity (including from foreign direct investments) and aren't overly tied to the successes or failures of the European or U.S. economies. This approach offers advisers a way to invest in an economy as a whole — not a specific sector that may be more susceptible to internal or external factors.
Many advisers don't realize that emerging markets such as the CIVETS are up this year.
For example, while the Dow Jones Industrial Average and S&P 500 fluctuated wildly, Egypt was up 26% through July 31. Too many advisers are ignoring opportunities to profit from foreign markets that are fundamentally sound and poised for continued growth.
We recognize the governmental and social risks in emerging markets, but the bigger risk is in the developed economies. It is in European countries such as Greece, Italy and Spain, as well as in the United States, where we see the same issues that led to the Asian economic crisis: political uncertainty, lack of financial stability, civil unrest, high debt and deficits, declining growth rates and unstable currencies.
Our research tells us that these problems will keep the United States in a secular bear market for at least the next 10 years. Meanwhile, our research into emerging markets, particularly the CIVETS, shows that they will continue to grow and outperform the troubled U.S. markets over the same time period.
CASE STUDY: VIETNAM
Vietnam offers a good, long-term example. It is the 40th-largest economy in the world and last year attracted more than $10 billion in foreign direct investment. That number is expected to nearly double this year.
So far, year-to-date, the Market Vectors Vietnam Index is up more than 25%, and the economy has all the right ingredients for further growth. There is strong foreign demand and investment, modest inflation and lower volatility, and the country's pharmaceutical and agricultural businesses are booming.
Vietnam's population is also becoming more middle class.
As we have seen in other nations, the growth of a strong consumer base is a precursor to further economic expansion.
We are at a turning point in banking systems around the world. Financial institutions in emerging markets have high liquidity and are solvent.
Gross domestic product growth in the CIVETS, including Vietnam, will continue to be in the 6.5% to 8% range annually to the end of next year, which compares with a U.S. GDP number of about 1%.
The future is now for the CIVETS, and we expect that some of these economies soon will outgrow those of developed countries. These nations are rich in people, resources and value, and should be a part of every adviser's client portfolio.
Dawn Bennett, founder and chief executive of Bennett Group Financial Services LLC, is fund manager for the Bennett Group of Funds.
