Emerging markets are a hot pick amongst ambitious investors. Growth potential in this bloc can be impressive. In some cases, areas are completely untapped or largely undeveloped, and as the countries improve their circumstances, the potential market becomes huge. However, emerging markets have not been looking so hot this year. While just because something is priced low, it doesn’t make it a good investment, there are reasons and ways to play emerging markets in 2016 that could make for a very happy new year.
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The Impact of Fed Policy
Before investing in an emerging market, you should consider the impact of federal policy, both domestically and in the home country of your investment. “Stimulus announcements in some nations and pro-growth political reforms in others might entice some investors,” writes Zacks. Also, investors should keep in mind that emerging markets tend to underperform when the Fed tightens its policies, or there is a rumor of a rate increase, but that doesn’t mean that a price decline is representative of the true value of the investment. Moreover, this bloc is much better insulated now than it was during the 2013 “taper tantrum”. It just depends on where you look, the industries you consider, and your entry point.
Pick Your Industry
As Bloomberg notes, some industries are doing better than others in emerging markets. Healthcare and Information Technology are doing better than other industries. Taken as a whole, they are down some 8 percent this year, but they are outpacing other parts of the emerging markets bloc. Also, Healthcare and Information Technology have placed in the first or second place for each of the past ten years in terms of performance within emerging markets. Consumer staples are also strong. They are third regarding performance in emerging markets this year.
Emerging Markets Index
The MSCI Emerging Markets Index (EEM), a collection of 836 companies from 30 countries with a focus on China, industrial, financial, and tech stocks, is poised to post a loss of almost 17 percent, its worst performance since 2011. This can be discouraging for EM investors who looked to emerging markets for their traditionally higher growth potential, but that doesn’t mean that there isn’t opportunity to make money in the current market and going forward. Investors would do well to be patient before investing in the MSCI Emerging Markets Index. “While the index is cheaper than it was, it could get cheaper still. It is trading in line with its February 2009 trough in book value,” explains Barron’s. “But with a price at 10.6 times earnings for the next 12 months, MSCI EM remains above its trough valuation in October 2008.”
Looking to China
It has been a rough year for the Chinese markets. According to Barron’s, “China names are trading at a discount to their five-year average P/E multiple, but they’re still above their 2008 low.” Plus, the MSCI Index does not reflect domestic consumption, and that changes things. China was trying to promote economic growth by encouraging consumerism this year, says Muhlenkamp and Company, which is a real change from its previous efforts to boost growth by improving infrastructure.
Investors should note that the long-term economic benefits of China’s focus on consumer spending are not felt in the MSCI Emerging Markets Index. That index simply does not include as many of those stocks, so investors who want to invest in China as an emerging market would be better off to look towards newer ETFs like EGShares Emerging Markets Consumer ETF (ECON) or invest in some balance between the two. While the pace of consumer spending in China has not increased yet, there is some real opportunity when it does. Slower growth is often of a higher quality, and it presents a great opportunity for investment going forward.
Other Emerging Markets
Of course, there are also some great options outside of China. Looking to Brazil, India, and Russia, the picture is still somewhat bleak, right now. “In Russia, shares are near their historical P/E, but still twice trough levels,” writes Barron’s. “Even MSCI Brazil is no bargain. And MSCI India reflects that nation’s relative appeal, with a 18% premium to historical valuations.” While investors could keep an eye on when those prices start to reach bargain levels, another option is to look at an ETF like EGShares Emerging Markets Core ex-China ETF (XCEM). That ETF includes roughly 700 companies, including Samsung and Taiwan Semiconductor as the top two holdings. It also provides exposure to some markets that may be difficult to play otherwise, like South Korea, Taiwan, and South Africa – each of which is in the top five by country allocation.
Companies in Emerging Markets
It may be better off looking outside indexes and more towards established companies with growing foreign bases. Investors can also invest in companies within emerging markets. For instance, Infosys (INFY), the India-based outsourcing company, exports its services, so the effect of a weak rupee on the company is minimal. Also, investors may also want to consider a stock like Kimberly-Clark de Mexico (KIMBERA.Mexico), which gives investors access to increased Mexican spending on consumer products like Kleenex and diapers. However, this takes a strong understanding of the emerging market as well as the company in which you are considering investing.