The emerging markets have emerged in 2002.
The economic growth in these nations, especially those in Asia, is rapidly accelerating at a time when the U.S. economy is still trying to shake off its cobwebs.
Providing a boost is the fact that investors within these countries have lately been keeping more of their money within their own borders, rather than sending it off to be invested in U.S. companies. While these are volatile investments carrying political and currency risk, their comparative returns for this year are impressive:
– Emerging markets (as tracked by the Morgan Stanley Capital International Emerging Markets Free Index) are up nearly 8 percent.
– The average emerging markets mutual fund is up more than 10 percent.
– The Standard & Poor’s 500 is down nearly 12 percent.
– The average U.S. stock mutual fund is down nearly 10 percent.
Because emerging markets aren’t that far along in their recovery, they still offer a lot of potential. However, it’s difficult to imagine them prospering if the U.S. remains in a bear market, since they’re sensitive to both the global and U.S. economies. The biggest stars among the emerging markets this year have been Indonesia, up 76 percent; Thailand, up 43 percent; South Africa, up 34 percent; Russia, up 32 percent; and South Korea, up 30 percent. Those with the least potential and greatest risk appear to be Argentina, Brazil, Turkey, Poland and Hungary.
“The growth of emerging markets should accelerate this year along with the global economy, with South Korea, Mexico and Russia currently our favorite markets,” said Kent Hargis, emerging markets investment strategist with Goldman Sachs.
His favorite stocks available in this country as American Depositary Receipts (ADRs) are Mexico’s Cemex (CX), a global producer and marketer of cement and ready-mix products, and Russia’s Mobile TeleSystems (MBT), a Moscow-based provider of cellular communications services with 2 million subscribers.
Stocks he likes that are traded only on foreign markets include Mexico’s Grupo Financiero BBVA Bancomer and South Korea’s Korea Telecom and Hyundai Motor.
“Many believe the U.S. stock market’s valuations are still too high, and a sideways U.S. market would favor emerging markets much as it did in the early 1990s,” said Brian Gendreau, emerging markets strategist with Salomon Smith Barney.
Emerging market stocks trade at a big discount to their developed market counterparts because their corporate governance is considered a serious problem. However, recent accounting scandals throughout the developed markets have people rethinking that. The weakness of the U.S. dollar is also pushing foreign investors away from the U.S.
“Any investor should be considering the emerging markets and foreign investments should now account for as much as 20 percent of the typical investor’s portfolio,” advised Arnold Kaufman, editor of Standard & Poor’s The Outlook newsletter in New York. “Emerging markets should be a smaller portion for conservative investors, but larger for the more aggressive.”
Put 5 percent of assets in emerging markets and 10 to 15 percent in other foreign markets, said Kaufman. Stock mutual funds give you the diversity of investing in many emerging markets without making a major commitment to one of them.
“Depending on how you define them, there are 35 to 45 emerging markets, some quite tiny,” said William Samuel Rocco, senior fund analyst with the Morningstar Inc. research firm.
Invest in such funds gradually. Do so if you believe in their long-term 10- to 20-year prospects and are willing to accept periods of good and terrible performance.
Their history has been up and down. Many emerging markets funds gained more than 70 percent in 1993, only to suffer double-digit declines when the U.S. Federal Reserve raised interest rates in 1994.
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Top emerging markets funds in 2002, according to Morningstar, are:
– Eaton Vance Emerging Markets “A” (ETEMX); three-year annualized return of 8.74 percent; up 18.56 percent.
– Bernstein Emerging Markets Value (SNEMX); three-year annualized decline of 1.54 percent; up 15.99 percent.
– MFS Emerging Markets Equity “A” (MEMAX); three-year annualized return of 1.40 percent; up 15.94 percent.
– Delaware Emerging Markets “A” (DEMAX); three-year annualized return of 4.09 percent; up 15.37 percent.
– MPAM Emerging Markets (MEMKX); no three-year record; up 15.05 percent.