You've heard the saying in every market, that there is an opportunity. It really isn't just a cliché that financial gurus throw around, but a real-life occurrence that brave folks act on, sometimes going against the grain.
Investors are currently running from emerging markets. This is clearly being shown in the amount of money that is fleeing mutual funds that are tied to emerging markets. As much as everyone says they will buy cheap and sell high, we are seeing floods of investors sell low and make the classic mistake of buying high.
U.S. stocks are still expensive. Even after the recent sell-off in the market, U.S. stocks are trading at roughly 17 times trailing earnings. The average emerging market stock sells for just 10 times trailing earnings. Put another way, U.S. equities are 70% more expensive than emerging market equities. Part of this has to do with U.S. stocks historically being seen as safer than foreign markets, but we have seen emerging markets dip far enough to now merit some serious attention.
Something to note is that you can buy most emerging market stocks today at lower valuations than they reached during the 2008-2009 financial crisis. As bad as things felt back in 2008, today, these markets have gotten even cheaper. The iShares MSCI Emerging Markets ETF (NYSE: EEM) is down over the last couple years and it’s currently down 13% YTD.
Let's take a look at a couple benefits in the emerging markets sector:
- Stronger Growth Rates. If you were a businessman, where would you rather operate? In an economy growing at 2% a year or in one growing three times as fast?
- Diversification. Emerging markets do not move in conjunction with developed markets. This actually means your portfolio can generate higher returns with less volatility, which is the whole point of diversification.
Headwinds are being Faced in the Emerging Worlds...
Emerging markets are heavily dependent on oil, which explains the headwinds that these overall economies have dealt with. China slowing down is having ripple effects that are negatively impacting emerging markets, being that China is a big buyer of exports from many emerging countries.
There is no guarantee that the bottom is in for these emerging markets. With further legs down in China and the west, we could actually see these stocks initially dip further, but one thing is clear: there is value to be found in emerging markets at these prices.
To be clear, I am not calling a bottom for emerging markets stocks, as we could be early. However, with stocks this cheap, I do know what a serious opportunity looks like... and this is it!
Investors have a very short-term memory and they are conditioned to expect again and again whatever their most recent investment experience was – good or bad. Unfortunately, for the last few years, emerging markets have performed poorly up until and especially in 2015. The fact is that now is the time to put emerging markets on your radars, because it is these markets that are trading at much larger discounts than the overinflated U.S. stock market, which is due for a substantial retracement, if not a crash.
Overcoming your emotions and entering this volatile sector is a challenge, and I wouldn't suggest putting all of your eggs in one basket. For more information regarding your specific investment needs, be sure to visit FMTAdvisory.com and start preparing for the new economy today.