As the US stock market (as measured by the S&P 500) continues on its almost daily march to new highs in the face of continued disappointing economic news, retirement investors should be on the lookout for markets that have the potential to provide more value going forward. Keep in mind the most important investing mantra: Buy low and sell high.
It's no secret to readers of this column that for the long term I am a huge fan of investing in emerging-market stocks (NYSEARCA:EEM) and bonds (NYSEARCA:EMB). Since the financial meltdown five years ago, while many Western countries watched as their debt was downgraded, including the US, emerging-market economies have continued to flourish and have seen rating upgrades. I think it's fair to say that countries like Brazil (NYSEARCA:EWZ) and South Korea EWY have stronger and more stable economies than France and Italy. And perhaps most important, they have none of the staggering debt issues that threatens the very sustainability of much of the developed world.
As a financial adviser who likes to follow global growth trends to help determine how to invest, it's a no-brainer to take a long look at emerging markets. As Tom Lydon wrote in a recent Seeking Alpha article: "Emerging markets are expected to post growth around 5.9 percent in 2013, compared with 2% for developed markets such as the US." The way it's looking now is that the 2% growth for developed markets may be exaggerated. That's a huge difference and something that will probably continue for the foreseeable future. Emerging economies sport young populations that are hungry for economic success, and many of these countries have made policy decisions that lower taxes, encourage entrepreneurship and cut down on corruption. A note to Israeli Finance Minister Yair Lapid: This is how you grow an economy, not by raising taxes.
I mentioned the need to buy low and sell high. Well, this really applies now vis-a-vis emerging markets. Over the last couple of years their stock-market performance has severely underperformed that of the word's major markets. Morgan Harting of Alliance Bernstein says: "Companies in emerging markets are more profitable and less debt burdened than their developed-market peers, and their shares trade at a deep discount.So when will emerging-market stocks close the gap with global equity markets? This year, the MSCI Emerging Market Index has fallen 4.7% in US-dollar terms, while the MSCI World Index for developed-country stocks returned 6.8%."
I think it's this very underperformance against the backdrop of strong economic fundamentals that makes for an intriguing investment. Due to continued nervousness and nonexistent yields, investors have been sticking with blue-chip companies in an effort to maintain stock exposure but in what they determine to be a "safer" way, and they pocket a decent dividend to boot. The potential pitfall with this strategy is that many of these stocks have been bid up so high that their actual business doesn't justify their price.
Remember Newton: "What goes up must come down." I am in no way predicting a huge market crash, but for investors looking for potentially good value and high income, emerging markets should be researched.
Harting makes the case: "But with profit margins now stabilizing across emerging companies after two years of downward pressure, and their stock markets trading at a 20% discount to developed markets based on forward earnings estimates - among the biggest discounts in five years - we think the market has overreacted. Here's why. Emerging-market companies are more profitable and less debt burdened than their developed market peers, and their economies are poised for a modest acceleration in GDP growth this year, following two years of deceleration. The consensus now expects a 12% rebound in emerging market profits in 2013, as operating leverage accentuates the benefits of incremental revenue gains. If companies deliver on these bullish expectations, we think equity returns should be very strong."
Another issue for retirees is income. As I mentioned, income investors have had to use dividend stocks to generate the cash they used to get on a bank deposit. Stocks in these markets provide higher dividends on average than US stocks. Yields on emerging-market bonds are significantly higher than their US counterparts, and with already strong and getting even stronger economies, investors may want to take a long look at this option. There is certainly risk with investing in emerging markets, and over the short-term they can be volatile, but speak with your financial professional to investigate whether there is room in your portfolio for this asset.
Additional disclosure: I do have clients that hold some or all of the positions mentioned.