Emerging markets stocks have been largely underperforming the U.S., making it difficult for investors who want to diversify their exposure. However, China’s economic pain may be creating a silver-lining opportunity for investors in India and Indonesia.
The Chinese government currently faces a nasty set of circumstances with its crumbling stock market and imploding real estate sector. To stabilize the situation, the government has prioritized saving the stock market over broader economic recovery.
This has led to a series of restrictions and bans on stock selling and shorting, implemented in a bid to rescue plunging equities. While these measures may offer temporary relief, they fail to address the underlying problems plaguing the nation’s economy.
The bigger issue is the People’s Bank of China (PBoC), which has taken only minor steps to stimulate the economy, such as cutting reserve and loan rates. These measures have had limited impact. A significant challenge for the Chinese government is issuing new stimulus cash and liquidity without negatively impacting the yuan or increasing the already unmanageable debt load.
That makes investing in China a big gamble. Yes, investing in Chinese stocks can pay off, but that may be more of a trade than an investment.
Emerging Markets Stocks: Invest in India, Indonesia
Luckily for investors, it seems there is a silver lining for India and Indonesia. Both countries are poised for 5%-6% annualized economic growth over the next few years, buoyed by significant investments. This growth trajectory provides a stark contrast to the economic turmoil in China. Granted these markets are not “cheap” per say, but they do at least have fundamentals behind them.
One of the critical factors that could contribute to the continued success of India and Indonesia is the potential for inflation to come under control, allowing their central banks to begin normalizing monetary policy. This normalization could create a more favorable environment for economic growth, making these countries attractive destinations for businesses and investments. Two ways to play this? Consider funds like the iShares MSCI India ETF (BATS:INDA) and the iShares MSCI Indonesia ETF (NYSEARCA:EIDO).
India’s markets have fared far better, but I suspect there’s a good long-term case for Indonesia to gain momentum in the years ahead because of China. Why? Because as China struggles to maintain its position as the world’s leading goods provider, there is a possibility for India and Indonesia to capture market share. The challenges faced by China could inadvertently benefit these neighboring countries as businesses look for alternative locations for their operations and investments. The shift could significantly boost the economies of India and Indonesia, positioning them as emerging powerhouses in the global market.
Bottom line? Not all emerging markets are created equal. Yes, China’s markets look like they could rebound, but there are bigger shifts happening.
This means if you’re bullish on investing outside the U.S., India and Indonesia could be better relative plays. The potential for these countries to attract businesses and investments away from China is real… and very early.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
