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I have a confession to make… I'm a big Harry Potter fan.
Last night, I was re-watching Harry Potter and the Goblet of Fire. In this movie, Hogwart's School of Witchcraft and Wizardry hosts the Tri-Wizard's Cup, an Olympics, of sorts, for witches and wizards from international schools.
Its purpose is to promote international magical cooperation.
Of course, the Cup is still a deadly competition with winners and losers, and potential death for the participants.
It seems to me that there's an analogy we can draw here, between the Tri-Wizard's Cup and the Global Market.
Let's look specifically at what's happening in the cutthroat global investment scene. There are many causes for concern, but just as many investment opportunities… if you know where to look.
On Wednesday, FT.com reported on major links between Asia and the Middle East.
The Near and Far East Connection
"More than a third of investors in Dubai's recent $1.25bn sovereign bond issue – divided into five-year and 10-year tranches – were based in Asia," wrote Robin Wigglesworth. "In the dollar-denominated tranche of Dubai's October 2009 Islamic bond, only 17 per cent of investors were Asian."
That's huge gain! Many of the Muslim nations in Asia are particularly eager to buy up Gulf-state bonds. And the Gulf states are even considering issuing bonds denominated in Japanese yen…
Sometimes these types of investments aren't even made available to U.S. investors, but there's a way to take advantage of this rising interest. In fact, there are three.
There are three exchange-traded funds that invest in Gulf state companies: Market Vectors Gulf State Index ETF (MES:NYSE), WisdomTree Middle East Dividend Trust (GULF:NASDAQ), and PowerShares MENA Frontier Countries (PMNA:NASDAQ).
All three of these ETFs have very low liquidity, though, and fairly high expense ratios near 1%.
They might not be the best investment opportunities for most people, but they represent a new trend in international economic cooperation.
(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the market for you with our easy-to-understand investment articles.)
China's Currency Question
Another trend that's sure to continue so long as there's inherent weakness in the U.S. dollar is sovereign wealth diversification.
Many countries are stuck holding U.S. dollars or U.S. debt in their personal piggybanks. No one holds more U.S. dollars and debt than China, and instability in the greenback has China scared. That's why over the past few years, China's been buying up companies and commodities all over the world.
It needs to put its dollars to use before they're worthless.
China has been on a campaign to become the biggest global power in Africa, and it is succeeding. In early 2010, it was reported that China bought up half the farmland in Congo. Eastern Congo is home to vast mineral wealth.
China's also been after African oil reserves. It gave Angola — OPEC's newest member — $20 billion in reconstruction loans in 2009. In return, Angola has given China access to its oil. All told, between 2003 and 2008, Chinese direct investment in Africa has soared from $500 million to more than $8 billion… And that was before the massive loan to Angola!
And remember that fated deal between Chinalco and Rio Tinto? China wanted to acquire a large amount of Rio Tinto stock in order to help influence iron ore prices for imports from Australia.
This kind of diversification is key to both China's stability and growth… And there's a new ETF that gives investors unprecedented access to Africa.
The IMF said of Africa, "One of the least noticed aspects of the global downturn has been the resilience of the sub-Saharan Africa region." Market Vectors Africa Index ETF (AFK:NYSE) provides access to a number of African markets, like Angola and Kenya. While the ETF is heavily weighted toward South Africa (28%), this isn't necessarily a bad thing. South Africa is the biggest economy on the continent, and attracts a large amount of foreign direct investment itself.
The New Europe Equation
My favorite area in emerging markets right now is what I like to call "New Europe." This area represents countries that are either new to the European Union, or in the process of becoming members. I'm talking about Poland, the Czech Republic and Turkey.
These countries are important because the bridge the gap between European and Asian markets… sometimes quite literally. Turkey lies on both continents. I've told you all about the iShares Turkey ETF (TUR:NYSE) a couple times already. Yesterday, this ETF closed up $1.25 on news that Spain's BBVA Group — a company I've profiled many times for you — wants to acquire General Electric's 21% stake in Turkey's best-run bank, Garanti. This stake is worth between $4.5 billion and $5 billion.
Garanti makes up about 14.5% of TUR's holdings.
Poland has two broad ways to attract investors: Market Vectors has an ETF out under the symbol PLND traded on the NYSE, and iShares' Poland ETF is traded under the symbol EPOL, also on the NYSE.
Both are up about 30% in the past six months, and have seen a sharp pullback since Monday. This might be an interesting time to consider adding a Poland ETF to your portfolio. Investor's Business Daily reminds us that Poland was the only European Union member to avoid dipping into a recession.
Both ETFs have an average dollar volume above $1 million a day, so liquidity shouldn't be a problem with small stakes.
In looking at the sector breakdown, though, I tend to like the Market Vectors Poland ETF (PLND:NYSE) a bit better. It has a higher weighting in industrials and telecommunications — two areas that have a lot more room to grow.
On the whole, international economic cooperation will continue, as both emerging markets and developed markets search for non-dollar-linked investment choices. Look for strong and growing economies with new and growing links to international markets such as the ones I've mentioned today.
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