Buy or bail on the emerging markets?

October 22, 2013 

The worlds emerging markets have been taken to the woodshed recently. Does this mean you should sell what emerging market stock you own? Or is this a buying opportunity?

The broad market index for the emerging markets was down almost 14% for the year as of a few weeks ago. These markets have always been volatile and for most U.S. investors emerging market exposure has typically been small as a percentage of their portfolios.

The emerging markets have performed well since their last currency crisis in 1998. If one had invested in the broad emerging market index then she would have experienced a return of about 13% annually, higher if dividends were included. Not a bad annualized return.

Emerging Markets have been victimized by money policies. The countries that feasted on this easy money in the form of easy credit are the ones that have been hit the hardest.

Brazil has boomed for the past decade mainly, like many emerging market countries, by selling raw materials to other countries like China. Its growing middle class sucked up this credit. Its economy peaked in 2010 with a 7.5% annual growth rate. Their currency jumped in value. They bought everything they could find. Households loaded up on debt. The Brazilian government in

vested nothing in roads or infrastructure to help its development. Near its low of late August the Brazilian index was down over more than 20 percent.

Compare that to Mexico. Mexico has grown more slowly but at the same time it has overhauled its economy, education and telecommunication system. It hasn't been a large beneficiary of easy credit. Its low in late August was down about 11%. A little more than half of what Brazil's loss was.

While I would still recommend a broad emerging market fund for most readers the more aggressive investor may want to pick and choose their individual countries. I would recommend individual countries only for the more aggressive investor. Be careful, India, the world's largest democracy with a growing middle class has been one of the worse hit economies. It was down about 26 percent as of late August.

As for active managers (mutual funds) in this arena, 75% of them underperformed their benchmark over the past five years.

Remember Europe? They were last year's pariahs. That would have been the time to add to current positions or step in. So far this year Europe is up almost 9 percent and more than 17 percent for the last 12 months.

Emerging markets have the potential to exceed the returns of developed markets over the long term. Faster economic growth often translates into stronger company profits and as a result higher stock prices. China and India account for almost one third of the world's population. The opportunities for long term growth are impressive.

So no, it is not the time to bail on the emerging markets. Let's not buy high and sell low. It is time to buy the emerging markets, be patient, do our homework and stick with our asset allocation.

Michael T. Doll, an Investment Advisor with the Longboat Key Financial Group, can be reached at 941-383-2300 ext 6 or Michaeltdoll@longboatkeyfinancial.com.

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