Investors are increasingly turning their attention to emerging markets. In fact, Morgan Stanley has an Emerging Markets index that consists of countries such as Brazil, Argentina, South Africa, Russia, China, Israel, Philippines, Peru, Egypt, Colombia, Venezuela, Thailand, Morocco, Poland, Czech Republic, Turkey, and India. according to the International Monetary Fund (IMF), such markets will experience about three times as much growth as developed economies. Here is what you need to know about investing in emerging markets:
If you do not have a huge appetite for risk, emerging markets might not be the best bet because they tend to be volatile. Mark Mobius, the executive chairman of Templeton Emerging Markets Group, says investors should consider a 10% market correction as normal. In established and mature markets, such as the US, investors would view such corrections as indicators of an unprecedented selloffs or even a recession. As such, investors who cannot stomach double-digit market corrections should invest half of their usual asset allocations to emerging markets. This is according to Christiane S. Delessert of Montis Financial, an asset management firm in Waltham, Massachusetts.
Many investors tend to be upbeat about the outlook of emerging markets. This is largely because these markets will likely account for 70% of the world’s GDP growth over the next few years according to a Forbes report. However, this does not mean that the future of emerging markets will always be rosy. A report published by AXA Equitable Financial Services, LLC, warns investors that there is “no free lunch” when it comes to emerging markets investments. Financial or economic malaise in one country can easily spread to others. A good example is Thailand’s devaluation of it currency, the baht, in 1997, which triggered a chain of currency devaluations across the region. Most Asian countries devalued their currencies to ensure their exports remained competitive in the world market. With this in mind, it is wise to avoid exuberance when investing in these markets.
Hunting for Bargains
Stocks in emerging markets tend to have lower valuations compared to stocks in developed markets, which means finding bargains is easy. A report published by the Wall Street Journal (WSJ) shows that mutual funds and other large institutional investors have shifted their attention to emerging markets to hunt for bargains. For instance, Ivy International Core Equity, a mutual fund that usually invests 8% of its portfolio in emerging markets, has ramped up investments to 15%. However, current spreads are unusual according to Nathan Rowader, director of investments at Forward Management LLC in San Francisco. For example, companies in emerging markets have a price-earnings ratio (P/E ratio) of about 13.4. In comparison, this figure is about 18.4 in the US, which translates to a five-point spread. Nevertheless, Rowader expects this gap to close in coming years.
In conclusion, investing in emerging markets is not for the fainthearted because volatility in these markets tends to be quite high. In addition, investors should not be driven by exuberance to invest in these markets. Finally, finding bargains in these markets is easy.