February 21, 2019 | A Better Emerging Markets Play: Mining

Talking heads on financial media have been gushing about emerging markets being the smart play for investors this year. The Fed sounding more dovish has really cranked the volume up on that drumbeat.

To be fair, that does make sense; a weaker dollar is a boon for Third World economies struggling with US dollar-denominated debt.

That said, so many funds and money managers are piling in that some analysts fear the sector may underperform the high expectations.

If the trade war doesn’t end soon and the global economy weakens further, the whole rush to enter emerging markets may go into reverse, with a vengeance.

On the other hand, most analysts agree with me that the trade war will likely cool off, if not actually end, soon. Whether that will cause the global economy to pick up or not won’t be known until it happens.

For now, I’m of the view that the odds favor a weaker US dollar and a dialing back of the trade war. Both are good for emerging markets.

But…

“Emerging markets” is just a fancy way of saying “higher-risk speculations in less-developed countries.”

Packaging these into an emerging markets ETF strikes me as being like bundling subprime mortgages into a debt derivative and marketing that as though it had a triple-A rating.

Mind you, I’m not saying that folks bullish on emerging markets shouldn’t bet on them via an ETF or somesuch this year. I’m just saying that they shouldn’t kid themselves into thinking they are investing when they are speculating.

And…

There’s a way to speculate on emerging markets without having to actually risk your money in them.

All these countries will consume a lot of raw materials as they grow. As their people’s standard of living rises, per capita consumption of copper, iron, nickel, lithium, cobalt—and yes, gold and silver, along with just about every other metal you can name—will rise. Natural resources as a sector are highly leveraged to the growth of emerging economies.

Fortunately, we don’t have to risk our capital on Congolese or Bolivian mining companies to benefit from this rising tide. We can buy shares in public companies listed in the US, Canada, the UK, and Australia that have projects necessary to satisfy the growing demand. Since metals markets are global, those projects need not be in any of these emerging economies in order to help satisfy their needs.

Best of all, resource companies benefit from strength in the developed economies as well. These are not all-or-nothing bets on emerging markets. They are vulnerable to global economic slowdowns, to be sure, but not as much as the emerging markets themselves.

All those analysts and fund managers putting their clients’ money into emerging markets—and individuals buying emerging market ETFS—would do well to keep this in mind. They are speculating, and there is a better way: mining.

Caveat emptor,

Lobo Tiggre February 21st, 2019

Posted In: Louis James

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