While the emerging market has had a terrible year, it has only just begun. However, keeping a perspective on the long-term gives investors both comfort and prospects for opportunities to invest.
Emerging markets have face three straight years of declining value. The MSCI Emerging Markets Index slid 8.4% in just six weeks of this year alone. The top concerns include China, the Fed policy and commodity prices. Together, these are spurring volatility.
If they are volatile why should I bother with emerging market equities?
These economies grow faster than in a developed nation. Emerging equity values are depressed, particularly when compared to developed market stocks. That means that there is powerful growth potential in emerging markets in the coming decades.
The same industries that are already mature endure slower growth and do not provide as big opportunities as emerging markets. For instance, financial services, private healthcare and private education are all growing at a rapid rate in developing countries. These are being driven by social and economic change. For instance, China’s economy is making the big transition from being manufacturing-driven to a consumer society.
The next question is whether to include China and investments or not. China is making a transition that is misunderstood right now. People are afraid of China and what’s going on there. Its economic slowdown is impacting growth. But the domestic consumption and growth are continuing to show strength. In particular, their Internet is growing along with private education in China.
In the service sector, fast food and car rental companies still have a fairly low penetration rate. What that means is that there is room for growth as they start to look toward convenience and services. Sure their currency is clouding the big picture right now.
So the government obviously has money as its tossed 342 trillion yuan into its markets. So the government in China has strategic incentives and tools to avoid devaluation. We mean when we say devaluation greater than 10%, we mean if it were to happen it would merely delay China’s transition to consumerism.
Is the Fed interest a big deal? Emerging markets have less debt than during the 1997 Asian crisis. Plus people anticipated and prepared for the Fed rate hike. Therefore, should have a small impact on emerging markets. Most cyclical growth is affected. Structural growth makes for a solid intact opportunity that is still viable.
Sure, the Fed movement affects the money flow and its movement. Emerging markets on a sell off could spike. Do stay aware and stay vigilant about the emerging markets. That should always be your stance, though.
Are emerging markets more vulnerable to lower commodities prices?
Russia is suffering an it exports commodities. Yet most Asian countries do not import commodities. More than 65% of MSCI Emerging Markets Index countries benefit when commodity prices are lower. This helps reduce their inflation and interest rates. That helps places like South Korea and India.
The most important question, of course, is what country is presenting the best opportunities right now?
Bottom-up stock picking informs the best country positions. India is attractive because lower rates bring greater opportunities to the surface and financial services and even in consumer durable goods. Indonesia’s improvements are not reflected in share prices yet, but it still is an opportunity. Peru is below the radar. But Peru is a burgeoning financial sector that is exciting. Brazil is gone back to being politically and economically risky and unpredictable. So it cannot be included in a fundamental stock analysis.
Think about three things. First, invest in long-term growth in companies that show signs of expansive trends. They are able to deal better with volatility over the short-term. Second, the bumps in the market are opportunities to invest in companies that demonstrate strong fundamentals but have under-priced or overpriced stocks. Third, stay active. Investing in an emerging market index will give you exposure to risky cyclical stocks and debt-laden companies that are vulnerable to rising rates. Active managers can steer away from trouble spots and toward companies capable of posting strong long-term returns in a recovery.