Some investors may be wary of emerging markets. One reason is due to China losing steam because of the rise in labor and energy costs. They are also experiencing a great deal of pollution and weakening European demand. If this isn’t problematic enough, investment and real estate bubbles are looking to erupt into problems that are even bigger.
While this seems rather grim, it really depends upon where you look for investment opportunities. Looking at the MSCI China index shows that it had climbed 9.4% by March 2012. The broader emerging markets did an even better job by jumping 14.4%. This is a major improvement after a loss in excess of 18% in 2011. Despite the losses, however, the emerging-markets index has had an average annual return of 14.6% annually over a ten year period and that’s rather impressive.
Why Invest In Emerging Markets?
But while all of these figures are promising, you may be wondering why you should invest in these markets. There are some rather common reasons and you may indentify more reasons throughout this article. The most common include:
1. The stocks are cheap
When stocks are bought at high prices, they do not guarantee that money will be made, but the odds are increased. Emerging market stocks are so cheap that they tend to trade an average of 10 times what analysts forecast them to trade at.
2. Emerging markets are growing the fastest within the global economy
When advanced economies only grew 1.6%, the economies of emerging countries grew 6.4%. Within 4 years, emerging markets constituted 85% of global growth.
3. Demographics favor emerging economies
Look at the aging population in the United States and how it increases the reliance on government benefits. This means that fewer individuals are in the workforce, which translates into less money being paid into taxes. Other developed countries are facing the same issues, but developing countries have younger populations and that means more in the workforce. More in the workforce means more contributing to economic growth.
4. GDP doesn’t mean much
Even if GDP falls, there are some industries that prosper within the country itself. Even in China where GDP has fallen, it is giving birth to a new middle class that is relying less on exports to generate income and this will have a positive impact on corporations.
5. Globalization will continue to rise
Despite how much some may try to stifle international trade or keep companies from moving operations to countries where the wages are lower, it will not stop. This means globalization will not stop. As companies move to developing nations, their economies are going to improve.
Keeping Your Eyes Open
Now that you have some reasons to invest, it must be done wisely. When you invest in emerging markets, you have to do so with your eyes open. The reason is because it is truly impossible to know which way stocks in emerging markets are going to move each month. These are the most volatile within the world’s stock markets. At the same time, there is too much promise for long-term investors to ignore them. The economies in emerging countries are growing rapidly than developed countries and there has been nothing to suggest that the trend will stop anytime soon.
But economic growth does not mean you can expect your money to flourish. Growth does not always convert into stock market gains. In other words, an increase in domestic product is not always related to the returns that shareholders receive. Some of this also has to do with Chinese corporations and others in developing countries seeing their shareholders as part of an agenda in which the shareholders aren’t necessarily the ones to benefit; the corporation benefits. This is them taking advantage of the lax regulations that allow them to corrupt.
All of this can make investing in emerging markets seem risky. However, there are some pulses to look at. For instance, the stocks are cheap. Here is something to evaluate: A measurement by the MSCI index shows that these markets are currently trading at 11 times the 12 month earnings estimated by analysts. The average is 10 times. According to the S&P 500, the stocks trade at 13 times these estimates. When looking at price to book value, MSCI shows that emerging market index trades are trading around 1.6 times book. In other words, the stocks are dirt cheap. When measuring profitability, it is a 21 and that is just under S&P 500’s return of 23.
What does all of this mean? It means that emerging markets are in better fiscal shape than developed countries, including the United States. This can be attributed to the aging populations in developed countries and the younger populations in developing countries.
How To Know What To Buy
Now you may be wondering what to buy and how to know it is a good investment. One of the favorites among U.S. investors is the Vanguard Emerging Markets Index (VEIEX). It is an actively managed fund and investors can buy the ETF version (VMO), which is cheaper.
Another impressive actively managed fund is the Matthews Asia Dividend (MAPIX). The reason why this one is favored by some investors is because of the paying of dividends. A corporation that pays out dividends is one that cares about its investors. This can offer reassurance that the company is not one of those corrupt businesses that could care less about the very people who hold ownership of the business. If you are more into dividends, Matthews only deals with dividend-paying stocks.
If high yields are what you want, then the Wisdom Tree Emerging Markets Equity Income ETF (DEM) may be the right one for you. The fund holds over 280 high dividend-yielding stocks from emerging markets. The volatility of the stocks within the fund is lower than the MSCI index and it sustained the least in losses during the economic downturn. This has something to do with the 6.5% yield.
If there is another fund that you are interested in, it is good to ensure that the fund is actively managed because this adds a certain degree of security. Dividend-yielding stocks can also protect you from the corporations that may place their shareholders on the backburner. You can also receive advice on which corporations within emerging markets may be best for your preferred degree of risk. In the end, your goal is to make a move that will allow your investment to grow in the long-term and emerging markets hold a great deal of promise to do just that.