While most forms of investment require a leap forward, betting on emerging market equity funds this year – Chinese stocks have already had two-figure declines – they can feel like jumping on the Grand Canyon.
Not only the shares of companies based in developing economies such as China, Brazil and Russia have been deceived in a long-term market: prices have fallen by about 40% between April 2011 and Thursday, compared with To a 44% drop in American stocks – but this time It was also hit with a double whammy of bad news late last year.
There was a decision by the Federal Reserve in December to raise short-term interest rates for the first time since 2006. Nearly zero-rate rates, intended to encourage risk-taking, prompted investors to pump billions of dollars into Developing world looking for higher returns and better returns.
Now the rates are a little higher and the mood is very different. “Fed’s uncertainty and guidance on future exchange rate accelerations are a big negative” for emerging market shares, said Brian D. Singer, manager of dynamic asset management strategies by asset manager William Blair.
In addition, a commodity market worsened as crude oil prices fell below $ 35 a barrel, from a fourth-quarter peak of $ 52 a barrel. The economies of many emerging markets are still tied to natural resources, which explains why the funds traded with larger holdings than the energy and base materials quotes have recently been addressed. For example, the Schwab Emerging Markets Equity E.T.F. fell in the fourth quarter over 1% and lost 16% in 2015.
Despite this bad news, money managers and market strategists say there is a convincing case for long-term investors to have a presence in the developing world.
One important reason is evaluations.
Historically, the price-earning ratio of emerging market stocks – based on five years of average or ‘normalized’ profits – was about 20 percent lower than the stock-price ratio for stocks in the United States, according to the figures compiled by the group Leuthold. During the global financial crisis in 2008, emerging market shares were actually traded at a premium of 20 percent.
Today, these securities are 53 percent cheaper than domestic shares.
The last time this was inexpensive was in 2000, shortly after the Asian monetary crisis raised questions about the health of those economies. From mid-1997 to 2000, emerging market shares fell by 30%.
Backwardly, said Jason Hsu, vice president of Research Affiliates, the consequence of the Asian currency crisis was probably among the best times to invest in these actions.
From 2000 to 2007, emerging market stocks tripled, while the stock index of 500 Standard & Poor shares of domestic shares was flat. “The lesson of the Asian currency crisis,” Hsu said, is that “rebounds can come fast and furious and waiting can sometimes hurt you.”
Research Affiliates predict that in the next decade, stocks of emergency stocks will surpass inflation by nearly 8 percentage points per year due to lower ratings. Conversely, the company expects blue chip stocks to beat inflation by only about one percentage point per year.
Fed’s rise in rates could harm the emerging world in a couple of ways: rising interest rates could slow global growth, which could further reduce demand for raw materials and increase national rates could also To strengthen the value of the dollar against emerging currency markets.
“If the dollar continues to strengthen, companies and countries that hold dollar debt could be affected by solvency problems,” said Arjun Jayaraman, a portfolio manager with Causeway Capital Management. This is due to the fact that their debt burden based on their local currencies would increase.
But Mr. Jayaraman also pointed out that if the Fed’s rise is more gradual than expected, leading to “a slow and steady rise in the dollar, emerging markets could make it better,” he said.
In addition, market observers believe that if China’s slowdown is not as pronounced as market fears, this may well be good news for emerging market share shares.
How investors can play this volatile group of long-term shares while contingent
Investors could simply “average dollar-cost” in equities in emerging markets, which means putting money to work on small stock markets on a regular basis, which investors already struggle with their 401 (k) retirement accounts.
“If you think that in the long run it would be convenient to put 15 percent of your stock market in emerging markets, but you do not know if it’s the right time for you, it’s a window for you – say 15 months – and you are committed to Putting 1 percentage point to work each month is hell or high water, “said Mr. Hsu.” This takes away the anxiety about the timing being exactly right. ”
Lewis J. Altfest, a financial planner in New York City, suggests to be selective about the type of emerging market securities you own.
For example, he said, “If you are concerned about raw materials, you want to be in those countries that are benefiting from low-priced raw materials, not victims.” He pointed to industrial and consumption economies like India and Korea Of the South that stand out for Gain with low prices of energy and raw materials.
Jeffrey N. Kleintop, chief global investor strategist for Charles Schwab, agreed that investors should stay away from raw material economies based on Brazil, Russia and South Africa, focusing instead on the most diverse economies, such as Mexico , South Korea and Taiwan.
To be sure, such a strategy has an inconvenience. While stock market valuations in emerging markets raw material producers are cheap dirt – Russian stocks, for example, trade with a price-earning ratio of around 6 – importers of raw materials such as South Korea and India are more expensive. The average price for the MSCI South Korea Index, for example, is around 10 while Indian exchanges record 19 times their projected earnings.
“Yes, emerging markets are cheap, but they are not the cheapest they necessarily want to own,” Kleintop said, citing the risk of cutting raw material prices.
At the World Development Fund Thornburg, which has beaten 90 percent of its emerging market peers over the past five years, Charles Wilson’s co-director is going for a “balancing” approach.
This requires sowing a portfolio partially with companies based in economies such as India that could not be damaged by lower base product prices. The main holding company in India is HDFC Bank, a large retail bank. Then the other part can be dedicated to “things that are cheap,” said Wilson. “I want to put China in that field. The market is too concerned about China’s growth prospects without noticing the low ratings.”
China Mobile, the world’s largest wireless telephony company, is one of the main fundraisers in China.
China is also of interest to Rainier Investment Management. “We want to focus on the parts of China that we will characterize as China 2.0,” said Derrick Tzau, an international heritage analyst at Rainier.
For example, he underlined that in the next ten or twenty-five years the demographic changes that take place in China – including the growing middle class and aging population – might indicate favorable conditions for the national health sector.
“Over the next ten years, the pharmaceutical market could be the second largest in the world outside the United States,” he said. Even better, that market is more likely to grow no matter what happens to commodity prices or interest rates.
If you are able to take a really long view, emerging markets may not be as scary as they seem.