Global Investing: Only 'Dead' for the Dumb Money

Have the tables turned?

Over the last seven years, emerging markets have trounced their US counterparts. Every year, a particular emerging market exploded upwards. In 2005, Zimbabwe’s stock market returned 1,600%. In 2006, Peru’s stock market rose 168%. And so on. Small wonder that the US placed 23rd out of 25 world markets for the period 2002-2006.

As the gains continued, institutional investors piled into emerging markets, pushing their indexes even higher. According to Howard Gold of the MoneyShow as much as $9 out of every $10 invested by US fund managers in 2006 went into international markets.

Like all investment manias, this one ended badly. The S&P 500 is now 15% off its October 2007 highs. In comparison, the most popular emerging markets—China and India—have fallen 50% and 30% respectively. In fact, nearly every emerging market you can think of —other than Brazil— is down more than the US in the last six months.

These losses have prompted many mainstream financial media outlets to question if investing in emerging markets will ever be a winning proposition again. The most blatant example was a Forbes article asking Is Global Investing Dead?

I often wonder if the mainstream financial press suffers from some kind of memory loss. Seven years of huge gains, followed by six months of losses and global markets are deemed “dead.”

If you want to find a dead market, look at the US. The S&P 500 hasn’t done anything since 2000. Yes, it plunged dramatically from 2000-2002, then rallied from 2003 to 2007. But overall, the S&P 500 is exactly where it was seven years ago.

Now, in the short-term, the US has begun to outperform many emerging markets. But that isn’t necessarily because the US is a better place to put your money. For one thing, US corporate profits—which drive the market—are disappearing quickly. Take energy companies out of the mix and corporate profits for the S&P 500 have fallen 26% and 30% in the last two quarters.

Those companies that continue producing profits are mainly seeing growth through their international segments. Heavy machinery manufacturer Caterpillar (CAT)  kicked this trend off with its 3Q07 results—its North American segment fell 11% while revenues outside the US increased more than 20%. Many other multi-nationals like GM (GM) and Adobe (ADBE)  have since produced similar results.

Make no mistake, global investing is only dead for the “dumb money”— mutual funds and other large institutional investors that were late to the party. The fact that they have been dumping emerging markets with as much fervor as they originally invested in them only proves that these “index-focused” investors are experts at one thing: missing the boat.

However, for the sensible value-focused investor, most of the best growth opportunities exist outside of the US.

The world economy is expected to grow by 4% this year. East Asia leads the pack with expected growth of 7.3%. The talking heads are quick to point out that this is lower than its 8.7% growth of last year. Of course, they don’t bother pointing out that growth of 7.3% is head and shoulders above the US which is clearly already in a recession—and a nasty one at that.

If you had a choice between investing in a market where profitability was falling and the economy was in a recession, or a market where growth remains above 4% and profits are soaring… which would you choose?

Warren Buffett and other investing legends have already answered this question for us: Look abroad.

Comments

[sb-tiger]

Valuations are important where you invest. The economy and profits may grow but if the stcoks are at bubble levels - you may want to stay away. Chinese stocks are a very good example.

Disclosure - short FXI (FXP), XLF (SKF), IYR (SRS), SPY(UYG)

[knight722]

"If you had a choice between investing in a market where profitability was falling and the economy was in a recession, or a market where growth remains above 4% and profits are soaring… which would you choose?"

I'd choose the one that has mispriced stocks within the given economic conditions. Your analysis doesn't indicate whether the stocks serving the EM economy are fairly valued or not. If an economy is growing at 7.5% and the market expects 10%, good luck.

[proseadvocate]

I agree with your article whole heartedly. Forbes is nothing more than a commercial rag and cheerleader for the few American companies that still buy advertising. As for me, I bought gold stocks in 03 and sold in 07. Bought China and Pacific Tigers in O5 and sold in early 07. I'm happy with 100% returns and look to get back into Pacific slowly after the world readjusts to our profligate overspending and absurd cocky belief that our empire is anything more than a modern day paper tiger.

[Trefies]

1. Zimbabwe's 1600% isnt so impressive when you consider their currency has dropped faster than Spitzer's pants at a brothel.
2. Lets give Bernanke the benefit of the doubt and assume he attacks inflation.. if so our currency will firm... if our currency firms how will that affect your theory??.. dramatically.. since a substantial portion of international fund returns over the last 6 years is attributed to the decline of the greenback.
3. agreed that oversees growth will be faster than domestic.... However you criticize US companies for generating all of their growth overseas when that has been the driving force behind nearly all international growth--- Exports--- take away the american consumer and tell me how much growth China will see? India et al?(substantially less than current valuations.. is my position.. right or wrong)
4. The US is a good place to put your money for one reason.... 10 years from now we will still respect the principals of Capitalism... Can you say with absolute certainty China will?Thailand? Zimbabwe?... revolutions can happen faster than you can withdraw funds... for that reason alone we should be afforded a safety premium.

-So basically-- yes globalism isnt dead... But i'd still be very very wary of over-doing it.