May 11 2009
Are Emerging Markets Better?
The headline on Yahoo Finance today: Party Like it’s 2007: Investors Prefer Emerging Markets Over U.S. Stocks. Why is that?
Could it be that the growth in the emerging markets is skyrocketing. Yes, that would be part of it. Could it be because the banks here have had solvency issues? Yes, that would be a part of it, too. But there are so many other reasons that emerging markets look wonderful to investors that even if the United States were not having difficult times, investors should be investing in those markets anyway.
The logic behind this is because emerging markets are poised to outshine all markets in the world. Emerging markets have not been saddled with the banking woes with which mature markets have had to contend. So while European and American markets have been falling, investors in emerging markets have seen great returns.
Consider that while the real estate bust has left a virtually dead landscape on the American scene, building and expanding in places such as China, Tiawan, Dubai, and Singapore is bursting forth. Cranes help the skyscrapers go up, up, up and with it, the promise of business going on in a brisk manner. This is the fundamental difference in the emerging markets versus the American landscape. Here unemployment has been at record highs. Not true overseas in some countries.
There are dozens of excellent emerging market funds. Choose the ones that fit your tolerance for risk, have solid returns and read over the prospectus. In there you should find the countries in which the particular fund you are analyzing is investing. That’s critical as some countries such as Russia have serious political difficulties that can lead to the squelching of good, sparkling businesses.
Why not invest in an ETF of Emerging markets? Because ETFs do not discriminate about which stocks are in their portfolios. That is fine if the market is moving in the upward direction. However, a bump in one stock can really hinder the general movement of the whole sector, especially considering political instability. You want a smart fund manager to pick these stocks for the overall fund.
Like many sector funds, emerging market successes come and go. However, until the banking industry shrugs off this black cloud hanging over it, some other investment vehicle is going to take the star. Emerging markets stand to benefit handsomely as the world rushes to join the western hemisphere in all of the bounty this world has to offer.
