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Money flowing to international markets

January 1, 2011

As America’s economy slowly recovers from the Great Recession, business in emerging nations like Brazil, Russia, India and China is booming—prompting investors to sink more money into international markets.

The MSCI EAFE, an index measuring performance of markets outside the United States, reported that its Far East index has grown 11.7 percent for the year compared with 10.1 percent for the Dow Jones industrials.

Overall foreign investment in the past decade is up 10 percent to 15 percent compared with the flat domestic market, said Chris Cooke, managing director at Wells Fargo Investments. Global investments at his firm are up 35 percent to 50 percent from 15 percent in the early 1990s.

Foreign investment has been attracted not only by sizzling economies but also by advancements in technology. James Titak, president of Thurston Springer Miller Herd & Titak in Indianapolis, said it’s not uncommon for him to have a client with 30 percent or more in global stocks.

“It’s best to have diversified investments, and having multiple emerging market funds is an easy way to do that,” Titak said.

Population growth has been a key catalyst for foreign markets. India and China have 1.1 billion and 1.3 billion people, respectively, and are growing quickly.

Not only are the emerging markets populous, but they also are youthful, an indicator Cooke attributes to a more consumerist society.

“This is a result of the emergence of half a billion people,” Cooke said.

China continues growing despite its one-child policy. Combine swelling populations with a booming manufacturing industry and China is on its way to having a thriving middle class. Titak said China will be an “exporting machine.” However, with a baby boomer generation seven times that of the United States,’ he believes there will also be a high demand for U.S. goods.

The United States is a fourth the size of China and India, noted Paul Coan of Wealth Management and Planning LLC in Indianapolis, but he added, “As they grow, they are going to need more goods and services.”

Titak said that, for the first time in decades, China has great hope for the future. The World Bank expects China’s economy to grow at least 10 percent over the next year. While Titak said China is a done deal, India has some major challenges regarding the education of its citizens. India also has a rigid caste system that limits the lower class’s contributions.

Indianapolis-based Brightpoint Inc. has benefited by expanding in Asian and Pacific markets, and has seen its year-to-date stock value rise 14.7 percent, to $8.89.

While Coan said the health of America’s economy has improved over the last two years, he expects to see money continue to go overseas.

“The world’s flat again,” Coan said. “It’s more interconnected.”

Parts of the world that were once seen as underdeveloped and chaotic are now proving viable investment options. Africa, for example, has benefited from its uranium deposits due to the rise of nuclear power. China has 13 operating nuclear plants with another 25 being planned or under construction.

However, part of investing in emerging markets is shouldering increased risks. South Korea has found success in auto exports, but it is now in limbo due to the recent North Korean bombing of Yeonpyeong.

Weaker property rights are also characteristic of the developing world. Indianapolis-based Eli Lilly and Co. loses millions every year to counterfeit pharmaceuticals manufactured in places like China and Indonesia, which not only hurts the company’s bottom line but also endangers the lives of countless individuals.

Investing in some developed nations isn’t much safer. Shortly after Ireland had to be bailed out by the European Union, Spain and Portugal are showing signs of failing. Germany, an island of financial stability, has fronted the recovery effort, but its membership in the European Union has hurt it, said Coan, as it is penalized by the devaluation of the euro.

The dollar, which was in free fall, is gaining on the euro. Coan said taking advantage of a favorable exchange rate is common practice as it provides a quick return on investment.•

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