Are Emerging Markets Attractive At This Point?

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Includes: ERUS, VOO, VTWO, VWO
by: Tudor Invest Holdings

Summary

EM has been beaten down badly.

Growth story is still intact.

Valuations in some countries are attractive.

An emerging market economy (EME) is defined as an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies. The term was coined in 1981 by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank.

- Source: Investopedia

Christopher Brightman, CIO of Research Affiliates, a subadvisor to PIMCO, came out in February and put his "head on the block" by stating that he thought Emerging Market could now possibly be the investment opportunity of the decade. Such a bold statement does deserve some afterthought and further investigation.

On October 18th, 2015, I wrote an article explaining why I thought you should put China on your investment map. If you had followed my advice at that time, you might have cursed and told yourself not to listen to such advice again. I still stand by my conviction. Just because something is cheap, does not mean that it cannot get even cheaper. Remember what the oracle of Omaha, Warren Buffet once said; "if you are going to buy hamburgers, would you not be happy to learn that the price has come down? You can then buy more hamburgers".

Build your wealth, one BRIC at a time

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First, we will look at the biggest emerging markets, often described as BRIC, which is an acronym for Brazil, Russia, India and China. It was Goldman Sachs chief economist Jim O'Neill that came out with a report back in 2001 which in essence highlighted the fact that these countries economic growth would far outperform the developed economies.

To describe all that is going on in these four countries would not be possible, in an article such as this. I have put together a scorecard on fundamentals, which I hope can guide you into what you might think about the various countries, and their prospects in terms of investing.

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If we look at valuations, like P/E and P/B, there are two markets that stand out from the rest. They are Russia and China. India could potentially become great, but so far it has been a difficult and slow journey, mainly due to a highly bureaucratic and inefficient government. However, it is estimate that India will manage to increase their GDP by 7.4% this year, followed by 7.8% next year. Inflation has also slowed down from 8% to 5%.

Russia

The market in Russia has been badly affected by its country geo-political moves, and the faith of the crude oil price. So far, this year, it does seem to be pointing in the right direction, as there are improvements in both areas. Barring any unforeseen event, reversing this trend, Moscow could be one of the big winners this year. Even after the recent gain we have seen, there are still plenty of opportunities to invest in Russia. Below is Blackrock's ETF (NYSEARCA:ERUS) for Russia

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Source: Yahoo Finance

China

In my article 18th October 2015, I used a graph from DBS Bank that illustrated the slowdown in China's inter-Asia trade. However, this graph only covered a period of two year. What is important is to look at a longer time frame. Here is a chart from HSBC's 2015 Annual Report, which gives a good visual explanation of the immense importance of trade in Asia. Shipping volumes to and from Asia, as measured in weight, has gone from 33% to 62%, as a percentage of world trade.

Source: HSBC

Although emerging economies are weaker as a reduction in trade, they should benefit from more USD liquidity. This will be a relief to many corporation within the emerging markets that over the last 12 to 18 months have been scrambling to secure USD to pay down their USD debts. This debt peaked at US$6 trillion last year.

Small is beautiful

In 1973, the British economist E.F. Schumacher published a book called "Small is beautiful". It was somewhat controversial, as it raised questions around the dogma of the times, which was that bigger was better.

In terms of emerging markets, we should not overlook those much smaller economies. One could even argue that the BRIC countries have already developed considerably, and as we can see with last year's economic adjustment in China, its growth trajectory is certainly going to be lower going forward.

Have a MINT!

The acronym MINT was originally coined by Fidelity Investments, and later popularized by Jim O'Neill of Goldman Sachs. It is the combination of Mexico, Indonesia, Nigeria and Turkey.

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The Asian Development Bank has just published their report, where they highlighted the fact that Asia, excluding Japan, is expected to grow their economy by 5.7% this year. This is in stark contrast to the rather tepid growth in USA, EU and Japan, which is estimated to come in at just 1.8%

Indonesia is one bright spot. Their economy is expected to grow by 5.2% this year, due to continued government spending on new infrastructure.

How can you participate in this?

Unless you have an edge, putting you in a position where you truly believe you can pick stocks in one or more of these emerging markets, it is in my opinion best if you simply choose an Index fund or an ETF that tracks the economic development in the emerging markets. In my opinion, Vanguard is doing a good job at a very competitive price, so I would not hesitate to recommend buying into their ETF (NYSEARCA:VWO)

Here is the comparison between VWO and Vanguard's S&P 500 ETF (NYSEARCA:VOO) and Russell 2000 (NASDAQ:VTWO)

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Source: Yahoo Finance

VWO is a fund consisting of shares in 3,670 different companies. You could decide you want to limit your exposure to certain countries. Each of the larger countries, like those in the BRIC's have their own funds, so you could choose to concentrate on one or more of those.

It is interesting to see how poorly EM has done in comparison to the stock market in US. I do believe that large institutional investors will gradually start to shift funds from the US market into EM throughout this year.

Conclusion

US is still without any doubt the world leading nation in terms of finance, and home to many very well run and profitable corporations. I do agree with Warren Buffet when he says that the future of America indeed look bright, so any investor should carefully search for alpha, where alpha can be found.

Nevertheless, a portfolio which is heavily weighted in one stock, one industry or one country, is not well diversified. The future of many of the emerging markets are in my opinion also bright, and belong in every portfolio.

To answer the question raised, is Emerging Market attractive at this moment, I would have to say yes. As a matter of fact, I shifted some out of US equities end of last year, and have been gradually adding in Emerging Market. For me that has been specifically equities in China, through the Hong Kong Stock exchange, because this is an area that I do follow closely. This might not be the right thing for you, as you should choose to invest in areas that you are comfortable with. The Vanguard FTSE EM ETF fund mentioned above, could be a good way to start.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.