Slowdowns, Panics Will Hit Emerging Markets Too

by: Roger Nusbaum

According to a study by Merrill Lynch, investors are the most optimistic on emerging markets than have been since 2004.

To quote the Bloomberg article, the bullishness is based "on the view stocks from Chile to Vietnam will be least affected by slowing economic growth."

This might be true fundamentally, but there is a reasonable argument that says otherwise.

I tend to lean toward there being less of a fundamental link between the US and emerging markets, but assuming this is correct, emerging market stocks will not be immune from fast declines down.

During the last few fast declines down in the US, emerging markets have dropped more. Of course, they have snapped back faster too.

No matter what you think about emerging markets and their fundamentals, there is no arguing that the last few panics have hit them harder. To think it won't happen the next time is a tough argument to make.

If the quote above is true, we would see this immunity during a slow selloff that leads to a bear market.

Vietnam is still going to put that very young and cheap labor force to work for the betterment of the country, regardless of the US economic cycle. Ditto the rest of the Next-11.

Despite my enthusiasm for this segment, I have been writing about moderation in the space for a long time now. Putting 20% into emerging sets yourself up for a wild ride - wilder, I believe, than most people want.

Longtime readers will know I have held ADRE personally and for a lot of clients for part of their emerging market exposure. In the last 12 months it is up 70%. A 3% weight a year ago would have added 2.1% of return to the total portfolio.

The point is not that you should buy this fund, but that a moderate exposure in the right place can add a lot but at the same time a catastrophic drop in this sort of a thing (which is possible) would not decimate the account.