Tapping Midcap Nations

Below is an excellent video by Hans Rosling at Gapminder showing how nations have grown income and life expectancy over the past 200 years. It illustrates developed nations flattening out at the head of the pack and now being caught by nations in the middle, including the familiar BRICs of Brazil, Russia, India, and China.

The video makes it obvious why many investors are focused on such nations as they offer the same sweet spot that midcap stocks offer: they’ve cleared most of their start-up risk, but still offer more growth potential than their mature counterparts. Watch:

When it comes to investing in emerging countries, I suggest going with an index instead of individual stocks. For example, I recently examined in The Kelly Letter some ways to tap the potential of Brazil, and found few stocks offering compelling advantages over their counterparts in developed nations.

My study found that the popular iShares MSCI Brazil (EWZ) was better for typical investor habits than the stocks of individual Brazilian companies. However, the Market Vectors Brazil Small-Cap ETF (BRF) has followed roughly the same trajectory as the broader market EWZ, but at a higher level in upswings for a better overall performance. Here’s how it compared with EWZ in various time periods ending November 19:

6 Months: BRF +52%, EWZ +26%
1 Year: BRF +30%, EWZ +1%
2 Years: BRF +149%, EWZ +52%
5 Years: BRF +149%, EWZ +51%

My take is that small companies are more sensitive to changes in consumer trends, and consumer trends are strongly positive in Brazil. Look how many people are entering its middle class, for instance, and imagine all the goods they’re going to want to buy for their homes, cars, vacations, and so on.

Something to keep in mind when evaluating emerging markets is that they often move in tandem for a region. Thus, when Brazil is doing well we’ll usually find that nearby nations are also doing well. Choosing between them can be tricky.

For example, the following national index ETFs have done better in the past year than the Brazilian ones you read about above, including BRF, shown here for comparison:

+50% ECH – iShares MSCI Chile Investable Market
+48% GXG – Global X/InterBolsa FTSE Colombia 20
+42% EPU – MSCI All Peru Capped Index
+30% BRF – Market Vectors Brazil Small-Cap

One country that does not have an ETF yet, but should and probably will soon, is Argentina. It’s nicknamed the “miracle” country because it’s growing even faster than its siblings without relying on the US economy as an export market. It exports mostly food to Latin American neighbors. Despite its high growth rate, its stock index is climbing more slowly than those of its neighbors, making it a relatively better bargain.

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4 Comments

  1. Brayden
    Posted December 2, 2010 at 2:03 am | Permalink

    Thanks for pointing that out, Jason. Nice find on the video.

    I was just reading about Argentina, and I’m anxious to see an ETF for that country soon. I was also looking at EWZ, but BRF seems far more attractive to me now. Do you like it at these levels? I have a hard time jumping into a stock/ETF that’s just rallied 40+%…

    • Posted December 2, 2010 at 11:18 am | Permalink

      Nearly everything has rallied a lot, but off depressed levels from the financial crisis. I think scaling into midcap indexes is a good portfolio strategy at all times, now included.

  2. Gregory Iwan
    Posted December 18, 2010 at 12:08 pm | Permalink

    I own three Argentinian stocks. I also own a few ETF’s, but not here. Actually, I don’t really get too excited over ETF’s, because their manager(s) sometimes make decisions with which I am uncomfortable. One monkey may not stop the show, but someone else is still driving the wagon. I prefer to at least navigate, and so I’d rather not be placed in the position where I might feel it necessary to sell an entire ETF holding (or a significant portion thereof), just to avoid what I consider a harebrained decision made by the person I hired to run a tiny portion of my gelt.

  3. Posted December 31, 2010 at 10:09 pm | Permalink

    Is it possible that we also do a study with Asian countries as I can see, most of them are on the rise when it comes to financial stability and economical status.

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