Emerging Markets Stocks
More Green Stuff e-Letter: Issue # 6
December 9, 2006
Emerging Markets Stocks: Beat the Heavyweights to Emerging Market Profits
by Alexander Green
Oxford Club Investment Director
Last month I joined Jim Rogers, Newt Gingrich, Steve Forbes, Susan Estrich, P.J. O’Rourke and a host of my fellow editors as a speaker at The New Orleans Conference, billed as “The World’s Greatest Investment Event.” During a break in the action one afternoon, a few of my colleagues and I hired a cab to tour the rebuilding following Katrina’s devastation last year.
Except there wasn’t much rebuilding to see. In the lower ninth ward in particular we were treated to row upon row of houses with the furniture in the lawn and the roof sitting in the living room. Greg Meffert, the New Orleans official in charge of city planning, says it’s “very possible” up to 50,000 houses will have to be bulldozed. Right now, most of the homes in the city are still uninhabitable. “Wow,” said one wide-eyed observer, “this looks like a Third World country.” Ironically, it doesn’t. The ninth ward looks hopeless.
Developing nations, on the other hand, are enjoying a remarkable period of prosperity within their own prospective emerging markets stocks. Low interest rates, high commodity prices and strong export markets are leading to heady economic growth in Latin America, Eastern Europe and Asia.
Let Developing Nations Help Develop Better Returns
Just look at the emerging market index this year. Despite a hair-raising sell-off from mid-May to mid-July, emerging market stocks are up nearly 30%. That’s more than double the return on the S&P 500.
And it’s not just this year. Emerging markets are up over 150% over the past two and a half years. The question, of course, is whether it’s too late to join the party. The answer is no. Here’s why:
- Over the past ten years, developing markets have gotten bigger, stronger, more liquid and less prone to contagious infection. (Who can forget the Peso Crisis in 1994 or the Asian Meltdown of 1998?)
- Today emerging markets are not just an exotic spice to add to your investment portfolio. They are an essential part of any reasonable asset allocation. And investors appear to be catching on.
- Four years ago, the shares of the 25 big developing countries that make up the MSCI Emerging Markets Index were worth only $500 billion. Today they’re worth over $2 trillion.
The reasons are clear. Most of the major developing countries have gotten their act together. They have freed their exchange rates. They have steered clear of running up massive current-account deficits. They have lowered taxes and tariffs. And with high raw materials prices and a good global economy, the outlook is positive in most emerging markets.
Especially since emerging market shares only make up 7-8% of the total value of world markets, whereas they comprise 24% of world GDP. (Remember too that Latin American countries have large and youthful populations. And thousands of little-known but profitable companies.)
The International Monetary Fund predicts emerging markets will expand at 7.2% next year, yet a recent Merrill Lynch survey of global fund managers found they are underweight in emerging market shares at the moment. As the big institutions continue to climb on board, volume should rise – along with prices.
The Best Way to Beat the Heavyweights to Emerging Market Profits
Here’s an easy way to get your surfboard out in front of the coming wave of institutional money. Just plunk for one of the two leading emerging market index funds, iShares MSCI Emerging Markets Index (AMEX: EEM) or the Vanguard Emerging Markets Index Fund (VEIEX).
EEM can be bought through any broker. VEIEX (part of our Gone Fishin’ Portfolio) must be bought through Vanguard: www.vanguard.com or 800.748.1387.
Rest assured, emerging market stocks are more temperamental than domestic stocks. But their lack of correlation with developed markets will actually lessen your overall portfolio volatility – and should give you a performance boost, to boot.
Best Regards,
Alexander Green
|
More Green Stuff’s Cribsheet:
- The 25 countries that comprise the MSCI Emerging Markets Index include: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
- Prior to May of 2006, the MSCI Emerging Market Index contained 26 countries; however, due to the erratic policies of President Hugo Chavez, Venezuela was dropped.
- At the current pace, in another 50 years, the economies of today’s emerging markets will eclipse those of the developed world in size.
- The average P/E ratio of the 25 countries in the MSCI is 13 compared to a P/E of 17.8 for the S&P. For price-to-book, the MSCI has a 2.1 compared to 2.76 for the S&P.
- During the past five years, GDP per capita in developing countries has grown annually by an average of 5.6% – compared to only 1.9% in industrialized countries.
Wit’s End
“The rain it raineth on the just, And also on the unjust fella. But chiefly on the just, because The unjust hath the just’s umbrella.”
~ Lord Justice Bowen
Investment U RSS Feed