(04/18/12) Buy Emerging or Developed Markets?

Jim Lowell, editor of Fidelity Investor, shares his view on where in the world to invest, suggesting investors not forget about foreign bonds.

Should you be investing in emerging markets or developed markets? We’re talking today with Jim Lowell. Jim, what do you think about that?

I think you should be invested in both, but I think you need to think about how you’re investing in each.

So for example, today, do I want to have a dramatic weighting in the established foreign markets of Europe? Absolutely not. Do I want to be overweight US multi-national battleship balance sheets? Absolutely so.

In the emerging markets, do I just want to own the equities, which is what most investors only own? No. A pairing strategy using both emerging-market bonds and emerging-market equities, either ETFs or funds, makes far more sense.

You have the volatility, but you can stay long in an area where truly long-term investors like ourselves want to be ten, 15, or 20 years out. We're going to make tons of money, but are going to have to hold their noses through some pretty tough patches.

Any particular regions within the emerging-market world that you particularly like?

Asia is clearly on everybody’s radar. That doesn’t mean I don’t like it, but it does probably mean that a lot of the story is currently priced in.

Still, when you look at the fact that the US debt to GDP is about 100%, and in the Eurozone it’s way north of 100% thanks to leverage...and then you contrast it to China, where it’s 17%, it’s hard to argue that somehow the emerging markets have worse balance sheets than the established economies that continue to kind of lord it over them in terms of being less risky places to invest.

So I like Asia. Pretty much across the board. I like gateways like Australia and New Zealand in particular, gateways into China. Japan for the equities, but as I said, not the yen. I think the yen weakens because the government’s going to try to drive their export business by weakening their yen.

Then in Latin America, Brazil is hard to argue against as a real economy, a real political system, real consumer based. The trouble is, I don’t think there’s much of that story that isn’t already priced in. Still, I wouldn’t want to be completely absent Brazil. I’d want to at least have a market weight there.

Now, you mentioned a moment ago in the developed market some of these old battleship companies. How can people get exposure to these? What’s the best way?

The easiest way is to buy the Diamonds. The Dow Diamonds Trust (DIA). State Street bought it from American Express.

You own the best of the best, literally battleship balance sheets. And we know all the companies there have almost as much (if not more) cash in their coffers than their own treasury. They’re able to borrow at effectively a zero interest rate environment to expand their own business reach, whether it’s through mergers and acquisitions, or as they’re building out their info structure and their Global brands.

We know through Coca-Cola’s (KO) recent earnings statement, McDonald's (MCD) recent earning statement, Ford’s (F) recent earning statement that overseas sales in the emerging markets are continuing to grow like gangbusters, even as they’re beginning to recover here at home a little bit.