I believe that investors would be well served to continue to hold and add to emerging market positions for the long term. The reward may not come overnight, but in my opinion, emerging market equities appear to be undervalued and provide a very attractive risk-return profile for patient investors. This guidance does require a leap of faith and a willingness to be temporarily wrong. After all, economic growth rates in the BRIC (Brazil, Russia, India and China) economies have certainly cooled and the MSCI Emerging Markets Index has continued to under perform the S&P 500 Index so far this year.1
This recent slowdown and underperformance has created an opportunity. Much of the economic slowdown in developing nations has been as a result of policy tightening in an intentional response to inflationary pressures. While rates here at home have remained historically low, many emerging markets were raising rates the last couple years. Now we are starting to see this trend reverse. Since the beginning of this year Brazil, India, and China have cut interest rates. This trend is not just in the BRIC nations. At least 17 other emerging markets have cut rates in 2012, from larger economies like Chile and Indonesia, to smaller economies like Kazakhstan and the Philippines.2
So what could go wrong? It will take time for this policy stimulus to work through these economies. There is always a lag between interest rates cuts and an economic pickup. In the meantime, we also have the risk of an overall global business slowdown, a distinct possibility right now. And of course there is Europe, where continued progress on their debt crisis will need to be made before investors regain an appetite for riskier assets like emerging market stocks. Never a shortage of things to worry about … and I did not even mention our pending elections and the looming âfiscal cliff.â
Despite these concerns there is much to be positive about. Growth in many emerging markets continues to outpace that of the developed world. We are also seeing a significant structural change in emerging market economies. This is especially evident in China. Many emerging markets are increasingly shifting economic growth away from exports to the developed world and into internal demand and trade with other emerging markets. The market volatility we have seen lately, especially in response to the Eurozone crisis, has driven emerging market valuations to well below their historical averages. An attractive opportunity may well be at hand in emerging markets. Forward looking, long term, and most importantly, patient investors have a chance to build exposure to this dynamic asset class while it is on saleâŚ and who doesnât like a sale?
- Cetera Financial Group, Dailey Market Briefing, 9-10-1
- Oppenheimer Funds, Capital Markets Quarterly Market Outlook, Q3 2012
Â Damien helps individuals invest and manage risk. He is a Certified Financial Plannerâ˘ professional and a principal of Walnut Creek Wealth Management. Opinions expressed are not intended as investment advice or to predict future performance.Â
Â All economic and performance information is historical and not indicative of future results.Â Additional risks are associated with international investing, such as currency fluctuations, Political and economic stability and differences in accounting standards.Â Investors cannot invest directly in an index. These are the views of Damien Couture, CFPÂŽ.Â Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.