2/4/2014 11:45 PM ET|
7 reasons to buy emerging markets
Scary headlines aside, while US stocks have been getting more expensive, their counterparts in the developing world have been getting much, much cheaper.
They say the time to buy is when there's blood on the streets.
Well, in emerging markets, it's there now.
From São Paulo to Seoul, and from Mexico City to Moscow, the rivers of ink are flowing red and investors are panicking.
After last week's rout, the MSCI Emerging Markets index is down about 4 percent so far this year, and about 10 percent over the past 12 months. Russia's down 5 percent since New Year's Eve, South Korea, 6 percent, and Brazil is in free fall, down nearly 10 percent -- in less than a month.
Bank of America Merrill Lynch says that U.S. investors have now yanked money from their emerging-market stock funds for 13 weeks straight -- the longest such stampede since 2002. They've been pulling money out of emerging-market bond funds for 17 weeks straight.
Using MSCI data, I compared the prices of the emerging markets and U.S. stock indexes going back 20 years. The slump in emerging markets, combined with last year's boom on Wall Street, has left emerging markets at their lowest valuation level, in relation to the U.S. market, since 2005 -- and well below the 20-year average. Emerging markets would have to rise about 20 percent, in U.S. dollars, to get back to their modern-day average relative level.
In other words, while U.S. stocks have been getting more and more expensive, their counterparts in the developing world have been getting cheaper and cheaper.
The Brazilian stock market now trades at barely 10 times forecast earnings, according to FactSet. It sells for less than one times annual sales, and sports a dividend yield above 4 percent. Stocks in Turkey are less than nine times forecast earnings. South Korea is below 10 times forecast earnings. These are inexpensive levels by historic standards.
And American stocks? They're trading at 15 times forecast earnings.
Curiously, according to MSCI data the small-cap stocks in emerging markets have held up much better (so far) than the large-company stocks. Typically small-cap stocks are more volatile, rising further on the way up and falling further on the way down.
A hypothesis: The collapse in large-cap stocks shows the outsize influence of western investors buying into these markets through mutual funds and exchange-traded funds. Such funds typically invest mainly in large caps. So if U.S. investors are all dumping their emerging-markets funds, those funds are being forced to sell all their (large-cap) holdings, driving down the price.
Should you buy?
The nervous Nellies will tell you that emerging markets may fall further. Perhaps they are right. BofA Merrill Lynch strategists believe that redemptions of emerging-markets mutual funds have not yet hit "capitulation" levels.
But there again, they don't know for certain. No one does.
But here is what we know for certain:
- Emerging-market stocks are now relatively cheap, while U.S. stocks are relatively expensive.
- Historically, the most successful investment strategy has been to buy what's cheap and sell what's expensive.
- Stocks are super-long-term investments, so what really matters is not what is going to happen next month or even next year, but what is going to happen over decades.
- Mom-and-pop U.S. investors, who have a long track record of buying and selling stocks at the wrong times, are heavy sellers of emerging-market stocks.
- Money managers, who loved emerging-market stocks when they were expensive two years ago, now hate them.
- Emerging-market economies are not a fad. They account for a large and growing percentage of the global economy. According to the International Monetary Fund, they now account for about 40 percent of the world's gross output when measured in U.S. dollars -- up from less than 25 percent a decade ago.
- Emerging markets generally are under-represented in the "global" equity indexes. Bank of America estimates emerging-market stock markets account for just 10 percent or so of the world's stock markets by value.
So even if you are not trying to "time" the markets, and you just want to maintain a portfolio of stocks with the maximum diversification, you should include a hefty dose of emerging-markets stocks in that portfolio.
And if you haven't recently "rebalanced" your portfolio, simple logic says you should take some of the profits from your booming U.S. stocks and use the proceeds to buy some more emerging-markets stocks. And to hell with the scary headlines.
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Not quite right. It's been successful to buy GOOD COMPANIES cheap and sell companies, MUCH MORE EXPENSIVE than they're worth.
Most of us Americans have NO CLUE if the emerging markets feature good companies, what the financial disclosure laws are in those companies, and what their prospects and competitors are. We have great difficulty determining asset value, durable competitive advantages, and what their track records means in terms of growth. Even if we invest in them through a fund, we have no way to estimate how that fund will do in comparison to other funds.
I once made a great profit from T. Rowe Price's New Asia Fund. And then I lost half of it before I realized I had no clue what I was investing in.
So I invest in stocks/funds in companies or sectors/locations I know.
I am gaining very good returns on my two emerging market investment accounts. Somebody has to put the machete to the vine in order cut the path for future capitalists, and it does reap rewards.
I don't expect a decade repeat of high flying emerging markets. In fact, I see stagnation in emerging markets for the next 20 years.
Wrong. Warren Buffett often points out it's better to buy a great company at a fair price than to by a bad company at a cheap price. In the vast majority of cases, we have no way of knowing how good the financial conditions of emerging market companies are and they often fail to live up to claims.
And his is obviously wrong in terms of bying emerging markets, since the article itself says the "Emerging markets would have to rise about 20 percent, in U.S. dollars, to get back to their modern-day average relative level."
Consequently buying them cheap means holding them even cheaper.
I have a really good recommendation of a website I just found called Bionic Traders, just do a search for them he should be able to find them. I recommend these guys because there course material is top-notch and their support is the best I've ever seen on the Internet. These guys take seriously teaching people how to trade and I'm very happy to recommend them to anyone interested in learning to trade for themselves, it really is a very lucrative business.
Hey Punks, "Do you feel lucky? Go ahead, make my day". For me, I'll stay short.
Easy now Barney! Don't get yourself all Fifed up!
A bit early for this advice. Check back next quarter.
And cut back on the third or fourth cup of coffee before writing.
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