When money flows into emerging markets - opinion

“Each life is made up of mistakes and learning, waiting and growing, practicing patience and being persistent.” –Billy Graham

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
Sometimes investing is like a child learning to whistle. I remember teaching my elder son how to whistle and he tried and tried and just blew out air. Fast forward a few years and we were sitting at a Hapoel Jerusalem basketball game – remember those days when you could attend a game, it seems like eons ago – and he was cheering and then did one of those things where you put your thumb and middle finger together in your mouth, and out came this crazy loud noise which almost exploded my eardrums.  I said to him; “I guess you learned how to whistle!” Anyone who has ever spoken to me in depth about investing or read my book on retirement planning knows that I am a big fan of emerging markets (EM). But far too often when I bring up the topic of allocating some investment funds into emerging markets, I am met with skepticism and the client inevitably says that it is too risky.
While once investors used to think of emerging economies as those loaded with natural resources, like Brazil, things have changed drastically. Much like Israel, where aside from the recent natural gas finds, the economy has very little in the way of natural resources. Rather economic growth locally is being driven by innovation, technology and a growing middle class that has become a big consumer base willing to spend money on all kinds of material goods. The story has become similar thought the emerging world. A few years ago the World Intellectual Property Organization reported that 46.5% of all global patents were registered in emerging markets. And all indications are that number is now well over 50%, with a surge in Asia. In 2005 just 20% were registered there.
Carlos Hardenberg, senior vice president and managing director of Templeton Emerging Markets group writes: “Emerging markets are no longer one-dimensional. We are seeing the cultivation of a new generation of innovative companies located in emerging markets – diversifying emerging-market economies and the opportunities for investors. At the same time, the emerging-market middle class has been on the rise. Greater consumer spending power has driven local companies to meet the demand for newer types of goods and services. We think this trend will likely continue to drive emerging-market growth and innovation.”
Relatively cheap?
The question then becomes whether this economic renaissance translates into an interesting investment opportunity. What we have seen over the last year is that after a decade of significant stock market underperformance vis-à-vis the developed world(DM), emerging markets have started to outperform.
According to Bloomberg; “Money is beginning to flow into emerging markets, as investors, flush from gravity-defying stock markets, look farther afield for opportunities. Emerging-market bonds, stocks and currencies are showing strength heading into 2021. Fourth-quarter portfolio inflows to these markets are at an almost eight-year high.”
Discussing the outlook for 2021 and beyond, Morgan Harting and Karen Watkin, portfolio managers at Alliance Bernstein write: “EM economies have started to recover from the impact of COVID-19. North Asian countries, including China, South Korea and Taiwan, have been most effective in fighting the virus, resulting in a milder decline in economic activity during the crisis and an earlier rebound than DM.
“For example, both manufacturing activity in EM and North Asian exports have picked up strongly in recent weeks. Other regions, such as Latin America, are starting to follow suit. There were signs of this during October, when EM equities outperformed DM stocks. In our view, solid EM stock performance probably reflects recent successes by the worst-hit EM nations in controlling the virus, while some DM counterparts, such as the UK and France, have had to reintroduce nationwide lockdowns. As a result, we expect economic activity in EM countries to strongly outperform developed regions in 2021.”
Keep in mind that historically a weak US dollar also helps these economies and they can access capital for much lower rates. And as anyone trying to convert dollars into shekels knows the dollar is weak.
Hartig and Watkin continue; “Valuations of EM assets are also encouraging. With EM company earnings expected to grow at over 30% next year, their stock prices look particularly cheap versus DM. For example, the price/earnings to growth ratio, which measures a stock’s valuation relative to its growth potential, is just 0.44 in EM – about half the US ratio of 0.82.”
Maybe just maybe after a decade of underperformance now is the time for EM to shine.
This is not a recommendation rather what I would refer to as investment idea generation. Investors need to do their own homework and analysis before investing in emerging markets. Make sure that this type of investment fits both your investment and risk profile and will help you achieve your goals.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il