What to Keep an Eye on When Investing in Emerging Markets

We find ourselves less than 2 weeks away from the end of 2007.  It seems like thoughts of what 2008 will bring are already seeping into the consciousness of investors these days.

CNBC has started taking suggestions from various fund managers on what they see for the new year.  I’m still waiting for my call from CNBC . . . . but not to be left behind I thought I would mention what I think is the biggest trend in 2008.  Just so you don’t feel shortchanged I’ll also give a few suggestions on how to make money from it.

So, what is this super trend that will make us money in 2008?

The US Dollar.  That’s right; duckets, clams, wampum, the good old greenback.  Whatever you want to call it the US dollar is the basis for a major trend in 2008.  Now, the way I see it, we can expect the US Dollar to remain weak.  It might even fall against foreign currencies like the Euro, Yen, and Pound for a very simple reason . . . interest rates.

The United States Federal Reserve is battling back a recession that many see quickly approaching.  In this epic battle, their weapon of choice is interest rates.  They make a cut here and a cut there . . . all in an attempt to stimulate growth in the economy.  

The problem is as interest rates fall, global investors look for higher yields in other countries.

As investors take their money overseas to achieve higher rates of return they first need to sell their US dollars for another currency.  This is what depresses the dollar.  Money flows out of the US and into higher growth and higher interest yielding economies.  This provides our first investment idea – emerging markets.  

As other economies become attractive to investment dollars, money naturally gravitates towards them.  Demand for emerging market equities accelerate, driving up prices.  Countries like China, India, and Brazil have already experienced this to a limited extent and I would expect the trend to continue well into 2008.  Taking a position in a country-specific ETF like Brazil or India could prove profitable.  

As growth continues in emerging markets it also brings increased demand for raw goods (commodities).  India and China are just beginning to develop their infrastructure.  Roads and bridges need to be built.  Water and sewage treatment facilities need to be installed.  Communications infrastructures need to be deployed.  All of these activities consume massive quantities of raw goods and the demand for commodities will continue unabated for at least the next 10 years.

The companies supplying basic goods to emerging markets are going to do well, real well.  One I like is Monsanto (MON).  They provide needed agricultural supplies to farmers . . . and everyone has to eat.  There are many other companies linked to commodities out there, the key will be to invest in those with significant international exposure.

Interestingly, most of the major commodities are denominated in US dollars.  Why is this important?  If you live in Europe and want to buy wheat on the US markets you need to trade your Euros in for US Dollars. Because the US Dollar has fallen in value, increases in commodity prices are not as dramatic for international buyers.

Now, one of the most important commodities is oil.  Prices have approached the $100 per barrel level several times this year.  For 2008 I would not be surprised to see it exceed that level.  The interesting thing about oil is that regardless of its price, (as long as oil stays above $50) profits will continue to be had by the major oil suppliers like Exxon Mobil (XOM), Chevron (CVX), and BP (BP).

So, in a nutshell, the weak US dollar will continue to stimulate growth in emerging markets.  These markets will continue to drive up demand for commodities.  And the most important commodity will continue to make loads of money for the major oil companies, and shrewd investors.