The Sane Investor

Opportunity in Emerging Markets Amidst This Panic

Although you note that ¨the MSCI Emerging Markets index is valued at just over 10 times trailing earnings¨, that only means that the fund is undervalued by historical valuations. That however doesn`t help you that much in determing whether the markets are going to fall much further.

I´m currently abroad in Argentina, and after spending a whole lot of time learning about emerging markets, it´s not really a case of whether the market that you´re investing in is in a recession, it´s more about what the people that invested in those countries are doing with their capital. Emerging markets have always been seen as a risky investment, and I can guarantee you that we´ll see huge flights of capital as people continue to panic. Economies can´t grow without capital, and that in turn fuels recession.

This is going to be the case especially in countries like Brazil that experienced huge booms in capital, since the sucking away of capital will leave that country all the more hurting (i.e. Boom Crash theories). These are export driven economies, and they can´t grow if international consumption isn´t growing. Thus, you can´t look at these markets as isolated situations. Consumer confidence in the U.S. influences these countries´ economies way more than we would like to think, and I really don´t think that people really appreciate how significant emerging market growth hinges on world capital supplies and general consumption.

At this point, calling a bottom in any market, not to metion emerging markets, is like trying to catch a falling knife. Have fun with that.