Go Non-Union: Invest in Emerging Europe

By Sara Nunnally, Senior Research Director, Taipan Publishing Group

Is Now the Time to Invest in Emerging Markets?

It was a very long two weeks… Not only was I watching the value of my dollar slip away, I was drowning my sorrows in Czech beer with a bunch of Canadians.

Needless to say, I woke up on the wrong side of the bed more often than not.

It was September 2008. I was starting my Eastern Europe reconnaissance trip when Lehman Brothers announced its bankruptcy, and the world’s biggest financial institutions fell to their knees under the sudden crushing weight of their poor investment decisions.

I should have run to the money exchange and turned all my dollars into euros. On Sept. 18, 2008, the U.S. dollar traded for 0.7004 euros. By the time it was clear that the government would not hand Lehman Brothers a bailout, the U.S. dollar was in a freefall.

On Sept. 24, one dollar would have only bought 0.6777 euros.

Let me put it to you another way. Excluding fees, if I had exchanged $400 on Sept. 18, I would have gotten €280.16. On Sept. 24, I would have gotten €271.08.

That’s a 3.24% drop in a week! Huge moves for currencies…

It may not seem like much, but when you’re on a travel budget and you’re keeping up with the Canucks at the bar… it hurts.

Lucky for me, I wasn’t in Euroland for long. After a brief night in Austria, I headed to one of my favorite places on the planet: the Czech Republic.

The Czech Republic has been on the verge of adopting the euro currency for years. But now, it is a good thing it didn’t. Since Jan. 3, 2009, the Czech koruna has climbed 8.2% against the euro. I’m sure Slovakia wishes it were in the same boat. Slovakia was to adopt the euro currency by January 2009.

The Slovakian currency was already trading much higher than its neighbors just before the transition. But the beer was just as cheap.

(If you’re headed to the Money Crisis Survival Summit in Las Vegas this weekend, ask me about the Alligator Bar and why I was blowing black snot out of my nose for a week.)

The Czechs’ stronger currency means more purchasing power. It is a double-edged sword, however.

The country’s exports are now more expensive, and it exports products mainly to European countries that are seeing the euro currency lose power.

Indeed, there are several countries with this same deal. They’re all “Union” members, but they aren’t tied to the euro. Countries like Poland, Hungary, Lithuania, Romania, Bulgaria and Latvia. Now, the opposition to adopt the failing currency is growing.

Let me explain why… it’s more than just the obvious idea of a currency that’s losing value.

The majority of Eastern European economies are still far behind the big, Western European nations.

Poland — one of the most promising new EU economies — has a per capita GDP of $18,800. That’s just under 53% of Germany’s GDP per capita figure.

Heck, even Portugal has a higher figure.

If Poland were to adopt the euro, consumer goods prices would shoot up far more quickly than wages.

The economy would flounder.

An interesting idea would be to find out how much further the euro would have to fall to allow Emerging Europe to be able to jump in without adjusting any of their economic factors. Could the euro be headed there?

Or will it die first?

One thing’s for certain… Even developed European economies aren’t going to want another Greece on their hands. That could happen if new EU members adopt the euro before they’re fiscally ready.

But this sets up a unique investment opportunity.

Emerging Europe will outperform Western Europe, and there are now ETFs that will give you a shot at these markets.

You can get access to a basket of Emerging Europe countries through ETFs like the iShares MSCI Emerging Markets Eastern Europe Fund (ESR:NYSE) and SPDR S&P Emerging Europe (GUR:NYSE).

Here’s the thing.

Both of these funds are super heavy on Russia. This might not be a bad thing, but if you’re targeting only Eastern Europe, or if you already have Russia in your portfolio, these ETFs might be both too much and not enough.

As solution is to look at the Market Vectors Poland ETF (PLND:NYSE), which we talked to you about back in October 2010.

This is the only single-country ETF for new Union members.

If you take a look at PLND’s chart, you might think I’m crazy… We’ve seen a bearish crossover in the moving averages, like Jared talked about on Tuesday. But I see real value here. PLND’s price has really come down out of the clouds.  Click here to view the article.

View larger chart here.

We are seeing the bottom for this ETF. The last time we saw a bearish crossover, the 50-day moving average fell sharp and quick. When it got too far away from the 200-day moving average, PLND suddenly found support.

We’re looking at just that scenario again.

Market Vectors Poland ETF (PLND:NYSE) is a buy at current levels. We could see a quick bounce back up to $24 for a gain of more than 20%.

But this could be just the beginning…

Use a 10% trailing stop for this one. It will be a rocky ride at first.

Publisher’s Note: If you want to learn more about the situation in Europe — get the inside scoop — you need to read what our Justice Litle has been telling his Macro Trader subscribers.

He recently detailed 7 Mega-Trades that are about to unfold. It’s all thanks to a “super-bubble” of debt that is about to go bust. If you’re not opposed to getting rich while others are going broke, here’s your exclusive investment report.

Editor’s Note: For updated information on this and related topics, see our new website: PremierOffshore.com

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