Broker Talk: The 'Real' Recovery Is Overseas (Broker Talk)

Published July 23, 2009 at 4:00 a.m.

It may seem like a risky bet, but emerging markets — notably China — have the potential to significantly outperform developed nations in the current environment, these brokerage experts say.

Who's Talking: Ting Lu, economist, Bank of America-Merrill Lynch

The Gist: While U.S. investors are scratching at the dirt looking for those elusive green shoots of economic revival, China's recovery is "real, robust and sustainable," Lu says.

Strong second-quarter GDP growth and other bullish data points indicate that the Chinese economy is poised to grow at least 8% year-over-year in 2009, the economist says. Such growth could convince more investors to shift their funds to assets related to China. In other words, "hot money [is] on the way," Lu says.

"We firmly believe that China’s authentic economic recovery (not just green shoots), robust GDP growth, stable currency and rapidly rising asset prices will attract more capital inflow," says Lu. "We have already seen a $178 billion increase in [foreign exchange] reserves in [the second quarter], and we believe more money is on the way."

Lu has long argued that China will be the first major economy to recover from the current global downturn, but cautions that doesn't mean growth will return to its previous double-digit pace. "The average growth from 2002 to 2007 in China was about 10.8%," Lu writes, "while the average potential growth in the coming five years, including 2009, may be only around 9%."

That cooling off is partly attributable to the fact that Western consumers are saving more and spending less, hurting China's export-driven economy. But, as Lu notes, "potential growth of 9% for the next five years is still very impressive, and is well above the global average." By comparison, the World Bank expects the global economy to grow just 2% and 3.2% in 2010 and 2011, respectively.

Who's Talking: Ted Truscott, chief investment officer, Ameriprise Financial

The Gist: Rallies in U.S. stock and bonds are a welcome relief and show that the Federal Reserve has been successful in pushing money off the sidelines and back into the market, Truscott says, but he remains concerned that it won't be easy adjusting to our new economic reality.

On the domestic front, the economy is still sailing into the teeth of some strong headwinds, including continued weakness in the housing market, soft consumer spending and the specter of higher interest rates and eventual inflation down the road, says Truscott.

That's why he believes investors need to look beyond U.S. shores to emerging market equities. "The important point now is that the relative growth level between emerging and developed economies has widened significantly," Truscott says. Emerging markets, he says, will present more growth opportunities and therefore attract more investor capital.

However, as enticing as the big four emerging markets of Brazil, Russia, India and China (the so-called BRIC countries) may be for investors, Truscott advises a cautious approach to allocation.

"Emerging market equities are a volatile asset class and in a downturn usually fall more than developed markets," he says. "While any investment in emerging markets is subject to suitability, we do not believe that emerging markets equities should comprise more than 5% to 10% of an all-equity portfolio."

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