Why We Over-Weight Emerging Markets 23 comments
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Everybody has a different stock / bond / cash allocation that is best for them. Whether the selected equity allocation is high or low, we think over-weighting emerging markets and under-weighting developed markets within the allocation is the better long-term strategy for long-term investors — except for investors currently relying on, or about to rely on, their portfolios for life style support for whom the volatility may not be appropriate.
Much is being made of the fact that the key US equity indexes are near or slightly above their year-end 2008 level. That is clearly better than not, but year-end 2008 was at a sorry level compared to year-end 2007.
These charts may help keep wider perspective. They are three-year daily percentage performance charts that also show the 200-day simple moving average (a commonly used measure of the primary trend) and the year-end 2008 level.
The first thing you may notice is that exceeding year-end 2008 is far from where we once were both on the high and low side. In most instances the primary trend is still down (only India shows a little curl up recently by its 200-day average).
The second thing you may notice is the superior performance of emerging markets versus the US, European and Japanese stock markets. We included Singapore and Australia as key developed Asia markets, ex Japan. They are also attractive, emerging market related countries that have outperformed the US, Europe and Japan YTD.
While the fact that emerging markets are ahead of developed markets this year is not sufficient to justify long-term over-weighting, it is certainly suggestive of the thesis. More importantly, we subscribe to the Mohamed El-Erian / Mark Mobius / Jim Rogers concept that emerging markets are “where it’s at”, where it’s going and where it will be for a long time going forward.
Goldman Sachs makes similar projections about long-term GDP, where they expect emerging market economies to displace key developed markets in terms of their size rankings. Specifically, they expect China to have a larger GDP than the US by 2027.
In our view, the massive changes in the structure of the US economy arising out of the recent credit crisis, the political opportunism that has followed, and the unprecedented US debt that has resulted will only accelerate and assure the relative out-performance of non-US markets over the long-term.
The US is in for a long workout period trying to overcome its new debt load, and find a new equilibrium for the dynamics of all the changes to rights and processes that have occurred and are expected to occur within the economy. Emerging markets will get less boost from US consumers, but they have created some internal consumer momentum of their own that can carry them forward while financially exhausted US consumers struggle and readjust.
We have been recommending for several years, that within whatever equity allocation you may have, if you are a long-term investor not currently or soon living through withdrawals from your portfolio, you should consider substantially over-weighting emerging markets and under-weighting developed markets.
We have no idea whether stock markets are likely to retrench from here, and if they do, emerging markets would probably fall harder as they have risen more. However, over the long-term, we believe they will substantially outperform the US, Europe and Japan.
click images to enlarge
Disclosure: we own some of the mentioned securities in some managed account.
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This article has 23 comments:
I am not personally familiar with ODVNX and have no opinion about the fund, but here are some links to information that will probably tell you much of what you want to know.
The February 2009 fund semi-annual report is here:
https://oppenheimerfunds.com/i...
The Oppenheimer fund data page is here:
https://oppenheimerfunds.com/c...
Here is an extract from the Morningstar analyst report
Oppenheimer Developing Markets is a sound choice for bold investors. ... Like other managers at Oppenheimer, Leverenz pays no heed to benchmarks, and long-term themes also play a key role. ... Clearly this fund is not for the faint of heart, nor is it a wise choice for those looking to make a short-term investment in emerging-markets stocks. Rather, investors that share management's long-term investment horizon should do well here.
The Moriningstar data page is here:
quicktake.morningstar....?
Using the 200-day Exponential Moving Average (also from stockcharts.com) gives a different impression, and in the opinion of many, a more reasonable representation of trends.
If you make arguments about the recent behavior of an SMA, as you did, you should at least point out that these changes are due as much to old data as new data.
Not that this has much to do with the main point of your article :-)
Local investment banks are targeting a double in domestic shares ... assuming flat currency vs. US$, we are looking at $20 in EWT in 2-3 years ... to me, Taiwan is the best "re-emerging market" in the world.
But I prefer to stick to the U.S., believing, as I do, in my ability to find "pockets" of emerging-like outperformance, and my greater familiarity with U.S. "pockets.".
I do use emerging stocks, on a case-by-case basis, when they fit into one of these "pockets" (e.g., materials).
The US dollar index fell from around 89 in March 09 to around 87 now. In the same period USD-INR fell from around 52 to around 48, much bigger fall compared to dollar index. This could mean a lot of USD is being converted to INR, hence greater demand for INR and hence lesser rupee per dollar. The converted funds are being put to immediate use in the Indian stock market, leading to near doubling of Indian markets from their March lows. This adds up.
Now, if you see rupee falling against dollar (conversion rates increasing towards the 50-mark) together with Indian markets falling, then it probably means foreign money is pulling out of Indian markets, as this would happen when they sell and convert the rupee back to USD. This phenomenon had happened from Sep 08 to Jan 09.
My asset allocations have been matching your thesis, since some time.
However, it's important to remember that in many of those countries radical societal moves (revolution, major regime change ...) are possible and maybe even to be expected. So the burden for those going "heavy" on emerging market is to follow closely the world event, their meaning and take action when required (i.e. exit).
Here are examples of realistic events concerning China:
a) China is a communist country with billionaires. How confused is that ;-)
A very serious contradiction that will have to be reconciled. It is possible that this reconciliation will be brutal and probably play out over a decade or more. Worst case scenario would be a freezing of foreign assets.
b) China's will face a multitude of other un-avoidable issues that have to be constantly monitored.
- Capital risk just getting too high, generating a capital exodus (back to where capital as been will treated for the last 100 years: US)
This could be triggered by a small political even, war ...etc... In my opinion, this is the most likely short term danger.
- China's most challenging task of bringing an additional 1 billion people to "1st world" living standards with all the traps and dangers in doing so (knowledge,revolt,reli... regions,water...etc...).
- The typical problems of developing countries at a huge scale (corruption,cooking the books...etc..)
- China's "1 child policy" will be a disaster for retirements. It is similar to the developed countries problem but x2.
Other emerging countries have similar issues with sometimes their own specificities.
A few points to consider; first, a US based multinational is not a "pure play", secondly, US based companies may suffer under a higher tax structure here, as the US struggles with deficit problems. Those are 2 points just off the top of my head. I'm not suggesting such companies should be avoided....just saying that investing ONLY in such companies is not an adequate substitute for direct exposure to Ems.
On Jun 13 08:43 PM User 422955 wrote:
> Many US companies -- particularly the larger ones -- have a large
> presence in developing countries. How is investing in such US companies
> different than investing directly in these developing countries'
> "emerging" stock markets?
Keep in mind that while the S&P 500 has substantial non-US revenue (and a complex mix of non-Dollar and Dollar based costs), the majority of its revenue is US revenue. Of the large minority that is non-US, a large portion is from other developed non-US countries. That means that emerging revenue is a small minority of total S&P 500 total revenue. The result is a dilution of the emerging market effect.
Another approach to getting emerging market exposure in a single basket would be purchase of a world stock fund, which would have emerging market companies, non-US developed market companies (which would have some emerging exposure) and US companies (which would also have some emerging exposure).
The consumer market is exploding in these countries while multinationals with professional management and relatively clean books will prosper.
Resource exporting developed countries like Canada and Australia should also benefit as well as countries like Brazil and South Africa.
Jobless people may take more meds, but if they get into trouble with side effects...
In the meantime, Barney Frank is talking about legalizing medical marijuana, which could open a floodgate of herbal analogues to expensive artificial substances made from left-overs from the oil industry.
Parts of the conventional industry will try to maintain monopoly conditions in this kind of environment, but the challenge is huge and blowback is a real possibility.
In addition to that, many people cut off from health coverage may cut their pills in half or work on titrating off with the help of sympathetic docs.
Add on to that intense competition and new building in the health-club industry, and there are a lot of challenges for traditional pharma. Active people make endogenous feel-good biochemicals to which there is some danger of addiction, but most people can stop short of anorexia.
Emerging markets seem like a "hot" topic, and so shouldn't it be the exact opposite that we should look for?
Big boys pump up the volatile EM and then the run will start, it is going to happen. Don't expect GE to double , however a Chinese stock of solar cell (you pick) may go 3 times in 3 weeks. There is no story behind that stock, just fast money chasing the gains