Talk About Money: Power shift is an opportunity for investors

We are in the early years of a historic shift in economic power, away from the United States and toward China and other emerging economies. And Americans’ investment portfolios are beginning to reflect that shift.
Americans poured a record $64 billion into foreign mutual funds last year, with more than half of that going into emerging market funds, according to Barron’s financial weekly. Helped by a weakening U.S. dollar, emerging markets outperformed U.S. markets by nearly a 3-to-1 ratio in 2009, as the MSCI Emerging Markets Index returned 74.5 percent, compared with 26.5 percent for the Standard & Poor’s 500 index of U.S. companies.
China, India and the other emerging economies of Asia have about 3.4 billion people, nearly 12 times the population of the United States. As more of them migrate from the countryside to the cities to work in factories, they begin buying cars and condos and refrigerators, and creating an urgent demand for more roads, bridges and other infrastructure. Consequently, demand for raw materials has fueled a commodities boom along with the emerging markets boom.
The results of this economic tsunami can be felt locally. Seagate has moved all of its manufacturing out of Scotts Valley, mostly to lower-cost countries — China, Malaysia, Thailand, Singapore — and Sessions closed its Scotts Valley warehouse and turned over much of its operations to a Korean company.
If you include as part of the emerging economies Latin America, Eastern Europe, the Mideast and Africa, then the emerging world already consumes more oil and has higher car sales and chip sales than the developed world, made up of Western Europe, Japan, the U.S. and Canada. The emerging world has 80 percent of the world’s population.
Despite last year’s rapid growth in investment in the emerging economies, they still hold only a tiny fraction of the world’s stock market wealth. But I believe in the years to come, more investment dollars will flow to emerging markets as people there pursue middle-class lifestyles, fueling economic growth.
Some say it’s unpatriotic to move money to foreign markets. Personally, I try to shop American whenever it’s practical. But I also believe in the American spirit of self-reliance, and I think investing money profitably adds to our country’s stability in the long run.
Investing in emerging markets involves special risks: Rules can change that handicap foreign investors, companies can be nationalized and currencies can fluctuate widely. The best way to invest in emerging markets is through a mutual fund or exchange-traded fund or by buying shares of U.S. companies that benefit from growth overseas.
As I said in last month’s column, I don’t like following the crowd. After their meteoric growth in 2009, I prefer a gradual approach to investing in emerging markets, using a strategy called dollar-cost averaging, which I will discuss in next month’s column.
• Mark Rosenberg is an investment consultant for Financial West Group of Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].