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Howard Gold
Jan. 21, 2011, 12:00 a.m. EST
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"¹ Previous Column
How to stay in the market's sweet spot
First Take "º
Is Pandit worth it?
By Howard Gold
NEW YORK (MarketWatch) "” While investors suffered through a lost decade in most U.S. stocks, they found gold in emerging markets.
In six of the eight years from 2002 to 2009, the MSCI Emerging Markets Index was the world's best-performing financial asset class, according to Callan Associates, a San Francisco-based investment-consulting firm.
We all know why: Emerging markets grew rapidly as exports thrived. With their stronger finances and faster growth in gross domestic product, they were a much better investment than the debt-ridden, stagnant developed world, including the good old USA.
Rising commodity prices might well reflect growing global demand as the recovery gets under way. But inflation in emerging markets is forcing central banks to slam on the brakes, while in the developed world, it's acting like a tax on consumers.
The MSCI Emerging Markets Index added 13.2% annually in the 10 years from 2001 through 2010, while the S&P 500 index /quotes/comstock/21z!i1:in\x (SPX 1,283, +3.09, +0.24%) barely broke even.
But nothing is forever in global markets, and we may be seeing one of those periodic turns of the wheel.
Last year the Wilshire 5000 (W5000 13,564, +13.54, +0.10%) advanced 17.2%, topping emerging markets' 16.4% gain. The U.S. market's victory was paced by the stellar performance of small-cap growth stocks, the market's newest hot spot. Read Gold's take on why small U.S. growth stocks have set the pace in MoneyShow.com.
So far, 2011 has been a disaster for some of the world's most stellar performers. Exchange-traded funds devoted to emerging markets are "breaking down like crazy," reported Nicholas Vardy, chief investment officer of London-based Global Guru Capital and writer of the Global Stock Investor newsletter. "They literally are just running out of gas."
Vardy said that in the last few weeks he's dumped stocks and ETFs from markets such as Indonesia, Turkey, Chile, Colombia and Thailand "” five of the best stock markets in the world in 2010. "They are all down 20%, 22%, 23%."
They may have further to fall too, and not just as part of a "healthy" correction "” because inflation is back, particularly in the world's fastest growing economies.
Emerging markets face rising wages, as well as higher material costs "” bad, bad news for companies trying to maintain profitability.
Just look at the numbers: Brazil, 7.6%; India, 8.4%; China, 5.1%; and Indonesia, more than 6%. Read how India ETFs are hit by inflation fears.
"Headline" inflation includes volatile food and energy prices, which have been soaring because of strong global demand and unusual weather patterns. Copper, cotton and grains have hit multiyear highs in recent weeks.
These prices do fluctuate more than those that make up "core" inflation. But growing demand for food, fuel and commodities from emerging economies "” not to mention recovering developed countries "” will keep both headline and core inflation higher over the coming months. Read Gold's 2011 predictions on inflation and other market-related events in MoneyShow.com.
It will hit emerging markets hardest. They're facing rising wages, as well as higher material costs "” bad, bad news for companies trying to maintain profitability without pricing themselves out of the market.
The Federal Reserve's loose monetary policy isn't helping either. "Hot money" is flowing into these markets, raising pressure on prices and driving up the value of many emerging currencies.
The Brazilian real has soared almost 40% from its low; the South African rand has jumped nearly 50%; currencies from Colombia, Chile, Indonesia and South Korea have risen by 20% and more.
Vikram Pandit is getting a raise from $1 to $1.75 million annually. Let that sink in for a moment.
5:20 p.m. Jan. 21, 2011
"RT @davidweidner: Pros and cons on the Pandit pay raise $C. http://bit.ly/eMi1cb" 6:25 p.m. EST, Jan. 21, 2011 from MarketWatch
"Commentary: Eric Schmidt's next act bodes well for tech http://bit.ly/gIdyO6" 6:00 p.m. EST, Jan. 21, 2011 from MarketWatch
"Citigroup increases CEO Pandit's base pay to $1.75 mln from $1 http://on.mktw.net/gqh43J" 4:32 p.m. EST, Jan. 21, 2011 from MarketWatch
"Facebook raises $1.5 bln in Goldman deal, will disclose financials by April 2012 http://on.mktw.net/eHIsGo" 4:26 p.m. EST, Jan. 21, 2011 from MarketWatch
"Dow ends day, week higher after GE's 7% rally Friday; Nasdaq slides 2% for week http://on.mktw.net/gn3edn" 4:04 p.m. EST, Jan. 21, 2011 from MarketWatch
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