It has been a banner year for emerging markets, with the MSCI Emerging Markets index up 73% in 2009, compared to a 25% jump for the S&P 500 index. A recent article in the NYT details the success that emerging markets have had in the “Roaring ’00s” and why their prospects continue to be bright in the coming decade, including some of the following highlights:
- In Ukraine’s PFTS Stock Exchange — a Wild East of investing that did not even exist until 1997 — shares soared more than 1,350 percent over the last decade.
- In Peru, stocks jumped more than 660 percent over the last decade.
- In India, the Sensex index leaped more than 240 percent over the past decade.
- Since the 1998 debacle, some developing countries have cleaned up their acts, balancing their budgets and improving their trade balances. As their economies grow, domestic investors have become big supporters of these countries’ stock markets. With interest rates low around the world, companies based in emerging markets, like their counterparts in the developed world, enjoy access to cheap money. High commodities prices have buoyed stock and bond markets in nations that are big exporters of commodities.
- As long-term investments go, emerging markets seem to have a lot going for them. On average, developing countries have less sovereign, corporate and household debt than developed countries.
- Their economies are also growing faster than industrialized ones. Merrill Lynch predicts that emerging market economies will grow 6.3 percent next year, while the global economy expands by 4.4 percent.
- Imports to the BRIC nations are likely to surpass imports to the United States for the first time ever in 2009, according to Morgan Stanley.
- Even if developed countries recover completely in 2010, emerging economies will account for 70 to 75 percent of the growth in global output “for the foreseeable future,” said Mr. Conway of Schroders.
- Morgan Stanley predicts that developing countries, including those in the Middle East, will account for 36 percent of total global gross domestic product in 2010, up from 21 percent in 1999.
Of course, the article also detailed some of the risks involved with investing in emerging markets, but the tone of the analysis was overwhelmingly positive.
Then came the point that I found fascinating:
Even after that influx, emerging markets still account for only a small fraction of investment portfolios in United States and Europe, the world’s money management centers. Less than 3 percent of assets managed by United States fund managers are invested in emerging markets.
For whatever reason (home-country bias, habit, fear…) Americans still are hesitant to allocate much of their portfolio to emerging markets. Perhaps, it is time to expand the investment universe!
Financial media is largely to blame here.
If you can stomach it!, watch “Fast Money” on CNBC. Notice all of the “hot stocks” they talk about, and pull up their charts - then compare them to the chart for EEM.
Or, for REAL giggles, compare them with the top 10 of the 32+ individual foreign country ETFs that are available today! Now, “Fast Money” might OCCASIONALLY mention trades in commodes (typically gold or oil), but 90% of the discussion is U.S.-based.
Ditto for “Mad Money.” JC used to do a bit called “Are You Diversified?” where the caller gave the top five positions they owned - which were invariably U.S. large-cap stocks!
These are TWO of the TOP FIVE financial shows in the U.S.!
In addition to that, you have some really idiotic segments on their other shows, such as their quick little “call the close” at the just before Power Lunch starts, where they go around the table and ask “are you a buyer or a seller of today’s close?” What?
Garbage in, garbage out. It’s really no wonder that the majority of investors (1) are centered on stocks, (2) are centered on the U.S., and (3) are infatuated with analysis of individual securities rather than focused on a systematic approach to market inefficiencies.
Good points, Bill. I left financial media out of my list of why U.S. centricity persists. Very true. I suspect the emerging markets will get more media coverage…some day.
How many EM funds are found in 401k plans 5% 10% at most - plans are hestiant to put them there b/c of fiducuary duty should look at high yield funds. One suer way to increase the percentage is through increased placement in plans.
[...] with 2 options: we can participate in a global economy or we can shut ourselves off from it. Andy’s article from last week highlights exactly this point. Only 3% of assets managed by US fund managers are exposed to [...]
Doing some analysis on a new ETF, this is a direct quote from Morningstar:
“Although other foreign-stock sectors such as emerging markets and small caps may have lower correlations with the U.S. equity markets, their much greater volatility makes them inappropriate core holdings for all but the most risk-seeking investors.”
Crazy…
Typical Morningstar…