It was a very hot, humid few days in the middle of the summer of 1997. I was in Hong Kong, witnessing the handover of the island territory from the British to the Chinese. For three days it had been pouring rain. Now, the day was at hand: July 1. The ceremonies were to take place that evening in Hong Kong harbor. A hedge fund manager I knew had secured me a spot atop the Hong Kong Stock Exchange building to watch the event.
Like magic, the sky cleared just minutes before the official ceremony began and stayed clear for another three hours, just long enough to accommodate the fireworks that followed.
But it wasn’t until I was back in my hotel room that I witnessed the real fireworks: the beginning of the Asian Financial Crisis.
Sitting on the edge of my bed, I switched on the news. The headlines said the Thai baht was collapsing. Under the weight of huge foreign debt and slowing growth, the Thai currency was devalued by20% overnight.
A few days later, it was the Philippines, then Malaysia, Singapore, and Indonesia. The entire region was aflame financially.
Within a few weeks, it was possible to buy stocks in the various markets at 30% to 70% below the prices they were trading at earlier in the year. That was the time to act.
Within a couple of years, those who invested in the weeks and months after the crisis made two to three times their money.
I cut my teeth on emerging markets. I’ve visited many and invested in many, and I’ve even been called as an expert witness for lawsuits that involve investing in emerging markets. Much of my book, “Where in the World Should I Invest?” is devoted to emerging markets.
In the book, I explain that there are several markets I wouldn’t touch unless they corrected massively. The major markets that I am not fond of are Brazil, Russia, India, and China—the BRICs. They don’t have the transparency or stability that I like to see when I am entering into a risky trade. And believe me: Emerging markets are risky places to invest if you don’t have an understanding of what you’re getting into.
Now, don’t get me wrong, there is money to be made. Big money. But there is a trick to investing in these markets, and it’s something most people just don’t understand. The rules that govern all emerging market investing are as follows…
The 8 Rules Experts Use When Investing In Emerging Markets
- Treat the investment as a trade, not a long-term investment…
- Invest when the markets are correcting, which happens frequently…
- Avoid investing in sectors that are heavily dominated by the government…
- Try to invest using vehicles that allow you to buy emerging market stocks at a discount…
- Be sure to understand the currency risk…
- Invest for capital gains, not dividends…
- Know that emerging markets are not liquid…
- Never invest “safe” money in emerging markets.
Recently I made another trip to Asia, this time to Thailand and Malaysia, to get a feel for what is happening on the ground. The Thai baht and the Malaysian ringgit both plunged in value by double digits last year, with the ringgit trading at 17-year lows. Some of this can be attributed to the slowing in China. In the case of Malaysia, a political issue, along with weak commodity prices, has caused much of the damage.
It’s not 1997 again, but valuations are getting really attractive, and I am ready to jump in when those valuations make sense. Stay tuned.
Good investing,
Karim Rahemtulla
Co-founder and Editor, Beyond The Dollar
