Emerging Markets Gain Relative Value in Europe's Woes

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Photo Credit: New York Times

While the rest of the world is tuning into the incredible decline in European equities and debt, emerging markets may be the largest benefactor.  Enabled with low debt to GDP ratios, strong export economies, and nowhere to go but up, emerging markets are now relatively strong against what were once considered the unsinkable economies.

Insurance Screams Sell

The cost of insuring against default, a popular indication of what is often to come, has exploded in Europe.  The cost of insuring European government debt against a default has nearly doubled this year alone from 59 basis points to 129 after breaching a record high of 167 at the height of the panic.

For each basis point, investors must spend $1000 to insure $1 million investments against default.  Therefore, for the record, to insure $1 million of European debt, investors would have to spend $16,700 per year.  The costs practically erode any benefit of investing in European debt, and the trend implies European stocks may be even weaker than thought.

Relative Value

Relative to other parts of the world, Europe isn’t nearly the investment it is purported to be.  Nations like Greece, Portugal and Spain, all plagued with debt and financing woes, are now considered to be riskier than developing, and politically unstable, Russia, Thailand and the Philippines.  Such a huge disconnect shows that investors want nothing to do with Europe, and they are more willing to invest and insure typically unstable nations than they are developed nations with larger debt loads.

Build on BRICs

The BRIC nations, or Brazil, Russia, India and China, are quickly becoming the world’s safest investments.  The four countries, each with impressive foreign currency reserves rather than debt, are better capitalized than most developed countries, and they have the fundamentals to project that future earnings will be equally strong.

Correlation is Key

The question going forward is whether or not the emerging markets will be depressed by general discontent with the equity markets as a whole.  With global trade virtually ensuring mutually assured economic destruction should a major power succumb to debt, the question is whether the emerging markets of today can build on a strong, internal consumption economy.

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