Some investors shy away from emerging market stocks. While I think it is prudent to invest in emerging markets in investor appropriate degrees, I can see why there is some aversion:
- Unfamiliarity
- More volatility
- Uncertain political & economic climate
- Currency risk
- Increased correlation (i.e. not a great diversifier anymore)
Despite the apprehension, there are positive facts about emerging markets that can’t be ignored:
- High debt levels in and other legacy economic issues in developed nations (see previous posts here, here, and here)
- Better demographics
- Increasing commodity prices, which puts pressure on a developed nation’s consumption
- Decreased political risk relative to developed markets, an interesting switch from a decade or two ago (i.e. heightened political and social risk in developed nations).
Also, when I look at the Morningstar numbers the SPDR S&P 500 has a higher trailing P/E than the iShares MSCI Emerging Markets Index. This means that despite having more reasons for higher growth in the future than the US equity market, emerging market equities are cheaper. I must admit, however, I believe there are greater risks that such high growth is not met.
Still despite all the positive tailwinds associated with emerging markets, many investors still won’t pull the trigger. There is an easy solution to this – buy domestic equities that have exposure to emerging markets. This alleviates or lessens many of the concerns I highlighted earlier while still capturing the positives that emerging markets exposure brings.
