The Case for and Against Investing in Emerging Markets Now
Economic growth is expected to be relatively strong. But these stocks also carry risks.
Economic growth is expected to be relatively strong. But these stocks also carry risks.
Emerging markets stocks have outpaced developed-market shares over the past 12 months, making them a tempting investment option. So is now a good time to take the plunge, or should investors stay away?
On the plus side, economic growth in emerging markets is expected to surpass growth in developed markets in the next few years. And emerging-markets stocks can be useful to U.S. investors for diversifying a portfolio, since they don’t move in lockstep with U.S. shares.
But emerging-markets shares come with higher volatility than developed-market stocks and an array of risks, including political risk, currency risk, liquidity risk—and economic risk, despite the rosy projections. And investors can get exposure to emerging markets more safely with a portfolio of U.S. stocks that includes companies doing business in those markets.
“Investing in emerging markets is a high-risk, high-reward proposition,” says Eswar Prasad, a trade-policy professor at Cornell University. “Many emerging markets have done well growth-wise, and their financial markets have had periods of success, but it tends not to last too long.”
With that in mind, here’s a closer look at the cases for and against investing in emerging markets now.
The biggest advantage of emerging markets today is their potential for stronger economic growth than advanced economies, investment pros say.
“About 90% of the world’s population under 30 lives in emerging markets,” says Michael Sheldon, chief investment officer at RDM Financial Group, Hightower, a wealth-management firm in Westport, Conn. “This may lead to stronger labor-market growth, increased productivity and stronger GDP and corporate profits over time.”
In contrast, developed countries have rapidly expanding senior populations and low birthrates, which makes it more difficult to find workers to fill new jobs, says Karim Ahamed, investment strategist at Cerity Partners, a wealth-management firm in Chicago. That can limit economic growth.
The International Monetary Fund forecasts average annual GDP growth of 5.5% for emerging markets in 2021-23, compared with 3.5% for advanced economies.
Emerging markets also represent diversification opportunities for U.S. investors. That’s partly because economic growth and financial-market performance in emerging markets are less correlated with the U.S. than advanced economies and financial markets are. In addition, emerging markets give U.S. investors currency diversification, which can be helpful when the dollar is weak.
While investors can gain exposure to emerging markets through stocks of U.S. companies that earn revenue from those markets, those stocks won’t give investors the full diversification benefit, Prof. Prasad says.
The strong economic and corporate performance that is boosting emerging-markets stocks also makes their bonds attractive, says Robert Koenigsberger, chief investment officer at Greenwich, Conn.-based Gramercy Funds Management, which specializes in emerging markets.
Inflation is less of a problem in most major emerging markets today than it has been at times in the past. Also, emerging-markets countries’ external deficits generally have narrowed, or totally reversed in some cases. “This should give emerging-market central banks more flexibility to absorb external shocks and deal with post-pandemic inflationary pressures, allowing them to tighten monetary policy without slowing growth momentum too much,” Mr. Koenigsberger says.
Emerging-markets stocks are more volatile than those in advanced economies. The MSCI Emerging Markets Index had a standard deviation of 18 over the past 10 years, compared with 14 for the MSCI World Index of developed markets, according to Morningstar. Standard deviation measures volatility, with a higher number representing more volatility.
The factors behind that higher volatility in emerging markets include political risk, economic risk, currency risk and liquidity risk.
And while emerging-markets economies generally have been on a sharp uptrend for years, some also have experienced serious downturns. Russia’s economy, for instance, shrank 2% in 2015, compared with 2.9% growth for the U.S. that year.
Emerging-markets currencies are a double-edged sword, providing diversification but also volatility. “When you try repatriating your investment, everything may be going wrong at the same time,” with the emerging market’s economy, financial markets and currency dropping together, Prof. Prasad says.
A declining emerging-market currency makes an investment less valuable when converted into dollars. And emerging-markets currencies aren’t only vulnerable to trouble in their own country—they also tend to decline against the dollar when the U.S. currency is gaining against other developed-market currencies like the euro or yen, regardless of what’s happening in emerging markets.
Meanwhile, market liquidity isn’t as deep in emerging markets as in advanced ones. “There’s always a risk with emerging markets: It’s easy to bring money in, but not always to take it out,” Prof. Prasad says.
On the bond side, corporate debt outstanding has soared 400% in emerging markets since 2010, Mr. Koenigsberger says. So, plenty of securities are available. But liquidity isn’t just about supply. “Due to fewer banks and smaller market-making operations at those banks, there is insufficient liquidity when investors look to exit the market” in many cases, he says.
One negative factor for emerging markets in the near term is that countries such as India and Brazil are having trouble dealing with Covid-19. That will likely weigh on emerging-markets stocks this year, Mr. Ahamed says.
For those who want to jump into emerging markets, what’s the best way? Mutual funds and exchange-traded funds will suit most investors better than individual stocks and bonds, because researching and trading individual securities in these markets is often difficult.
When it comes to the question of actively managed funds versus passive index funds, “you can make an argument for active management to provide some downside protection,” Mr. Ahamed says. “But an ETF gives you very broad-based exposure in a way that’s generally cost effective, with lower fees.” Most ETFs passively track a market index.
For bond funds, actively managed is the way to go, Mr. Koenigsberger says. The growth of emerging-markets debt amid continuing economic challenges in many countries puts a premium on active management to sort out the winners, he says. Emerging-markets bond indexes tracked by passive funds are usually weighted by market capitalization, so the most heavily indebted issuers have higher weightings. “Emerging-market debt isn’t an asset class that is suitable for index funds,” Mr. Koenigsberger says.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 4, 2021
This stylish family home combines a classic palette and finishes with a flexible floorplan
Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.
It’s easy to buy clunkers when you’re caught up in the moment. But regrettable purchases aren’t inevitable.
Trying to buy just the right souvenir on a trip is a risky business. You can wind up with a lifetime treasure—or an albatross you feel stuck with forever.
Consider the giant painting of a chicken flying out of Cuba that has been hanging over our couch in Palos Verdes, Calif., for the past 15 years. Buying it cheaply seemed to make sense when we were in Havana, since my husband’s family had fled the country after the revolution.
But the flying chicken just didn’t seem as, well, poignant by the time we returned home and hung the 4-by-7-foot painting. No guest has ever said a word about it. “I can’t help you with the chicken,” an art dealer told me long ago when I asked for help in selling it.
So, how do you find the right souvenir? Or is there even any such thing?
For many people, the answer to the second question is an unqualified “No,” and they have stopped trying. “Souvenirs never look as enticing or beautiful as they did at the time of purchase once you get them home,” warns Patricia Schultz, the author of “1,000 Places to See Before You Die.”
After collecting rugs on her trips, then Christmas ornaments, before running out of room at home for both, Schultz says, “I have gone cold turkey. I collect memories.”
But for others, surrendering just won’t do. “It’s intrinsic when people travel that they wind up bringing a keepsake of the journey,” says Rolf Potts, the author of “Souvenir,” a book that traces the history of travel souvenirs back to the earliest recorded journeys.
“It can be a way to show off,” he says. “Much like the envy-inducing travel posts on Instagram.” But for many people, he says, “It’s proof you were there, not only to show other people but also for yourself.”
For those who lean in this direction, there are ways to help avoid regrets. Tara Button , founder of the Buy Me Once website, and the author of “A Life Less Throwaway: The Lost Art of Buying for Life,” suggests focusing on practical items that fit your lifestyle and double as mementos.
As an example, she once bought a “very affordable” baby blanket made from alpaca fiber on a trip to Peru and now uses it every day. The blanket not only reminds her of “the time pre-children when I was traveling,” she says. “It goes over my 2-year-old son every night. It’s always soft and always gorgeous.”
She has a friend who collects one cup from each destination. “Those are perfect memory keepers,” she says. “A small item that is used every day.”
One obstacle to finding the right souvenir is that it can be hard to think practically when you are swept up in the excitement of a new culture. Consider the Burmese puppet, 15 inches tall, that has spent about two decades in the closet of Liz Einbinder , head of public relations for Backroads, an adventure-tour company.
“We saw a lot of puppets everywhere and just got caught up in all of the Burmese art and culture,” she says. Now she wonders, “Why did I bring this back? It sits in the back of my closet and I can’t seem to get rid of it. It creeps me out when I see it.”
When that buying urge sweeps over you, Button and other travel experts suggest pausing to consider your lifestyle, taste, needs, and the scale of your home—you’re going back to the reality of your everyday life, after all.
But that doesn’t necessarily mean being entirely practical. Einbinder collects miniatures, mostly miniature houses, from every country, and has more than a hundred. Most are in storage, but she keeps a little London bus and a little Egyptian pyramid on her desk. For her, souvenirs aren’t just about memories, they’re also about the hunt. “It gives me something to search for” on each trip, she says. “That’s half the fun.”
Another way travelers often go wrong is by giving in to pressure, or at least persistence, from salespeople.
When Kimba Hills, an interior designer, went to Morocco, she hired a guide who took her to a rug store in Fez, where the dealers delivered a whirlwind sales pitch while serving tea. She wound up buying a $4,000 flat-weave Turkish rug, measuring about 13 feet by 9 feet.
“No one in my group could believe I got seduced,” she says.
When the rug finally arrived at her home in Santa Monica, “It smelled like cow dung,” she says. Washing the rug was going to change the color.
When she called the dealer in Fez and demanded her money back, he refused, offering to send her a different rug instead. “We got into a yelling match,” says Hills. “All my skills went out the window.”
Looking back, she says, “You are in a buying mode because you are there and feel like you should buy something.” On a recent trip to Mexico, she bought nothing, explaining, “I’m wiser.”
Spontaneity can cut both ways. There’s the chicken painting. But waiting for inspiration to strike, rather than planning to go home with a souvenir, can still help.
Henry Zankov, a sweater designer, says that when he travels, he explores his destinations with the idea that he won’t buy anything unless he comes across something he loves. He still buys plenty, but says “I don’t have regrets.” At his home in Brooklyn, he has ceramics, vases and glassware from shops he found randomly in Spain, Greece, and Italy. “I buy what I have to have,” he says.
There are times he doesn’t find anything. “So I just give up,” he says. “It’s OK.”
Some souvenirs do become the treasure of a lifetime.
Annie Lucas , the co-owner of MIR, which offers tours to less-traveled destinations, became captivated by a mirror on a trip to Morocco. It was made with hand-pounded silver and pieces of camel bones.
She went back to the store three or four times, debating the cost and whether she would regret it once she got home. It was heavy and measured 24 inches by 40 inches.
“That was 15 years ago, and I still treasure it,” she says. “If I had to get out of my house and had only five minutes to pack, I would grab that off the wall.”
This stylish family home combines a classic palette and finishes with a flexible floorplan
Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.