The United States Markets are reaching record highs on a regular basis. It’s become increasingly difficult for value investors to find bargains. This often leads investors to wonder if there are opportunities in emerging markets. But is it worthwhile or smart to invest in emerging markets?
Emerging markets are often more undervalued compared to their more mature counterparts. Dividend yields and PE ratios are also more attractive as investors are rewarded for taking on more risk and volatility.
Emerging markets can really boost returns if you take appropriate action to reduce your risk. This can be done in a variety of ways, but most importantly it will require an iron stomach and great attention to financial details.
Investing in Emerging Markets is the Smart Move
According to the foremost authority on emerging markets. the MSCI index creators. Emerging markets have performed better than the world market as a whole, and by a wide margin no less.
Their study tracks returns since the year 2000. Now its likely their index picks and chooses the best emerging markets to invest in but, if we are using their country list as a basis for investment, there is no reason we can’t achieve similar returns.
Emerging Market Inconsistencies
Depending on who you ask and what year it is emerging market countries seem to change. But again since the MSCI seems to produce some good returns we might as well take their word for it and focus on those countries.
According to the MSCI these are the most up to date emerging markets:
| Africa | Americas | Europe & Middle East | Asia |
|---|---|---|---|
| Egypt | Argentina | Greece | China |
| South Africa | Brazil | Czech Republic | India |
| Chile | Hungary | Indonesia | |
| Columbia | Kuwait | Korea | |
| Mexico | Poland | Malaysia | |
| Peru | Qatar | Pakistan | |
| Russia | Philippines | ||
| Saudi Arabia | Taiwan | ||
| United Arab Emirates | Thailand |
Looking at the list a few countries pop out to me. One of them is Poland since I have invested in the country in the past. The others are in Asia.
China oddly enough is still considered emerging market even though it is the 2nd largest economy in the world, but the population size is what really matters, even though its big, its still not fully developed.
The others are India and Korea since both of these countries I have seen many companies trading below fair value. They could be ripe for investment.
A Deeper Look at India
The best way to find a bargain in stock is to search in a very large pool. Since India has a very large population its bound to have a lot of companies.
Upon further investigation on investing.com I have uncovered 5981 total companies. That is a lot of companies that could potentially show a lot of promise.
Compare this to a country like Poland where there are only 855 and its easy to see where a larger concentration of potentially great companies would be lurking.
Is it Worthwhile investing in Emerging Markets?
It is incredibly worthwhile to invest in emerging markets. The returns are some of the highest you can get. These returns are often more sustainable than the cyclical trends of some advanced markets.
This is because they are working from a lower basis point and are usually more reliant on fundamentals than future growth prospects.
For example India has a number of companies trading below book value. Whether this is because of distrust in the financials or confidence in management, they are statistically cheap.
Unlikely Emerging Market Wins
I recently invested in a company in Poland that has given me outstanding returns. This company was trading below net current asset value. In other words this company was extremely cheap.
Eventually its revenues and earnings started moving upward and it caught the eye of many investors. This pushed the stock price upwards. With cheap emerging market stocks, even small positive outcomes can turn into large gains.
NTT was one of my better investments in an emerging market country. It also paid a dividend which is beneficial and further boosts returns, while I waited for it to return to a proper price.
It’s also important to note what type of emerging countries you are investing in. Poland is a relatively safe country, since it has close ties with the European Union. However Poland still retains its own currency, the Zloty, so currency risk is still there.
The above example is not an isolated incident when it comes to many emerging market companies. There are many small companies that can produce big wins, but its important to be vigilant.
Is it Safe to Invest in Emerging Markets?
It is safe to invest in emerging markets but there is always risk. This is the case with any investment. However, times have changed in the past the United States would take action against countries that ruined shareholder wealth but that is not the case today.
If you invest in another country and the stock goes south, you have little recourse. For example, to counter the positive experience with NTT I had in Poland I also had another stock that has essentially gone to zero.
The Story of a Defunct Shipping Company
KDM shipping seems to have gone completely dark. Its a company that operated out of Cyprus and services the black sea and Mediterranean. Its share price was hurt by the Crimean situation with Russia.
Shortly after the company decided to halt its market reporting and sold bonds to a shell company. At this point it looked shady and should have known to get out. However, trading was halted when the Polish stock exchange could not get a hold of the owner.
What to Look for in Emerging Market Stocks
There are a few things to look for in Emerging market stocks that may help you avoid stocks that are frauds.
- The company stops reporting its financials.
- The company does not pay a dividend. If its not returning wealth how do you know its even real?
- The country you are investing in has poor minority shareholder rights.
- The country has poor rule of law.
The above examples are reason many stick to their own markets and dare not venture out. But, there have been many situations where investors have been burned in the United States as well. Think Enron.
Protect Your Portfolio From Risk
The best way to protect your portfolio is to invest in a company that is trading below its value. Also known as value investing. The easiest way to invest in value is by reading the balance sheet.
In depth knowledge of balance sheets can help you figure out what investments have the best probabilities of achieving outstanding returns. But, for those of us just starting out its best to look at the Price to Book value or P/B.
Buying companies below their book value allows you to take less risk in a riskier environment. Stay away from debt laden companies and you should be fine.
Diversify Your Portfolio
What if I told you that there was a way to get these amazing market returns but also take on less risk. Well it is actually very simple. Buy more stocks. In fact you should probably hold a basket of stocks no less than 20 in size if you are investing in emerging markets.
The risk of catastrophic failure of your portfolio and being able to mirror the emerging market averages is reduced to a few percentage points.
This can put any investor at easy and make you sleep much easier at night knowing that you made the smart move to invest in emerging markets and you did it the right way.