Time to Buy Emerging Markets Again
04/07/2008 12:00 am EST
Richard Band, editor of Richard Band's Profitable Investing, says that after their selloff emerging markets are attractively priced again, and he finds a good way to play them.
While it's true that many emerging markets held up longer than ours in 2007, the global undertow finally grabbed them.
From the October high to the February low, the MSCI Emerging Markets index plunged 17% (in dollar terms), a slightly deeper decline than the Standard & Poor's 500 over the same period.
But the truth is, the emerging economies have weathered the global slowdown remarkably well. What's more, the emerging stock markets-while no longer drastically undervalued, as they were at the beginning of the decade-still look cheap at only 14x earnings for the past 12 months.
Unlike technology stocks in the late 1990s or real estate a few years ago, the emerging bourses are nowhere near bubble territory. Bottom line: When global equity markets perk up again, probably later this year, stocks from the emerging markets will almost certainly be among the leaders. If you're serious about growing your portfolio over the long pull, you'll want some exposure in this area.
I expect that returns from the various emerging markets (especially the larger countries) will gradually converge. Reason: In a globalized economy, competition tends to level out wages, interest rates, currency values, and other factors that go into the cost of producing goods. No single country can hold a mammoth advantage over the others forever.
Also, in the next year or two, I'm looking for the stocks of larger companies in the emerging markets to outperform smaller companies-part of the worldwide tendency for investors to flee to blue chips for safety in times of economic stress.
In short, conditions are ripe for investing in emerging markets through a broadly diversified index fund such as iShares MSCI Emerging Markets Index Fund (NYSE: EEM). Thanks to EEM's global mandate, you'll automatically own all four of the powerhouse BRIC countries (Brazil, Russia, China, and India), which together make up nearly 45% of the fund's assets.
Moreover, you'll get plenty of exposure to Mexico, South Africa, South Korea, and Taiwan, as well as smaller but dynamic economies like Chile, the Czech Republic, Indonesia, Israel, the Philippines, Thailand, and Turkey.
As a capitalization-weighted fund, EEM gives a wider berth to bigger companies. So you'll benefit if, as I predict, large caps continue to lead the way in coming months. Finally, EEM operates on a much more frugal basis than your typical actively managed international fund. Annual expenses amount to just 75 cents per $100 invested, roughly half what the average international mutual fund charges.
All in all, EEM looks like the perfect "high octane" vehicle to play a rebound in the global stock markets. A year out, I figure the fund will have made us 30%-50% richer, including dividends. Buy EEM at $142 or less. (It closed below $141 Friday-Editor.)