Tahsanul Hoque is currently working in Internal Accounts Payable in Morgan Stanley. He is a postgraduate of Ohio State University in Finance and a graduate of North South University. Even though he is a banker by profession he is also an avid investor by choice.
Most global stock investors are now well familiar with how their investments started 2014 after a phenomenal bull market of 2013. With US Fed taper in the horizon forcing a currency crisis in some emerging economies and S&P 500 going down by nearly 6% at peak, you must be wondering what you should do with your investment portfolio. You must be wondering that the good things have to come to an end at some point, right?
I have recently advised a strategy in my blog regarding why you should remain in US capital markets for now. But what should you do if you are thinking about putting more money in emerging markets? You may think this is the good time to buy emerging stocks, since they are now very cheap. Emerging markets after all the big buzzwords on everybody’s lips. While on technical terms they are now cheaper compared to other major global stock indices, you should avoid investing in them unless you are a short term trader.
Under performance of EM even during the supposedly golden times
Let’s look at some popular Exchange Traded Funds on emerging market stocks in Wall Street and Europe and their performance over last 5 years.
Now you do not need a Bachelors in Finance or Economics to notice the general trend of these investment performance since 2010 (2009 was the only year where they performed well in these graphs). In most cases, the long term investor did not see any gains by investing in broad based emerging market funds. It seems to be they are in a slow bear market since middle of 2011. (Mainly due to unfavorable currency conversion issues with these investments)
Further federal reserve tapering on the cards
Remember the big picture in these graphs is that US Federal Reserve did not yet begin their tapering on full fledge. Instead the hot money from Quantitative Easing have been pouring into these investments during this timeframe. The slow tapering has just started for 2 months. Do you think the emerging market funds can manage to gain with Federal Reserve slowly withdrawing their stimulus? Think again. Your money is better invested somewhere else.
Chinese entrepreneurs diversifying outside China is a leading indicator
On the other hand, rich Chinese entrepreneurs are hastily trying to make other countries their second home. This is a subjective issue but sometimes these give some indications.
It does not take too long to notice these emerging markets have structural problems that need to be corrected by their government. So till then, it is better to avoid them.
What should we do?
Instead invest heavily more in US markets or frontier markets. Even though they also face headwinds from Fed tapering, the underlying short and medium term fundamentals are good enough to support these stocks. See these funds and their performance.
I still believe that over the very long run, emerging markets will be the leader in global investments. Ultimately the developed countries and their insatiable appetite for debt is not sustainable in the very long run and this will lead to major de-leveraging. However, as long as emerging economies do not increase their domestic consumption, as long as they remain export focused only with developed countries, I do not see them growing to be a major leader too soon. It will happen ultimately but not in the near future that is for sure. So for now avoid these markets. But if you are still a believer in Emerging markets for short to medium term horizon, I suggest you look at Emerging market Technology ETFs (such as CQQQ)
Disclosure: Please take your investment decision with your own knowledge and analysis. The analysis given is the author’s own independent view.