Evolving Emerging Market Strategies - A Tactical or Core Component of Asset Allocation?

Kenster1_GlobalValue

Calamos

http://calamos.com/~/media/Shared/Commentary/2012_06_08_11048_EMCORECOM_0512Q R_fnlfd

Evolving Emerging Market Strategies
A Tactical or Core Component of Asset Allocation?

The growth of the middle class—particularly in emerging markets (EMs)—is fuelling global economic expansion. This growth scenario presents many opportunities for investors. Accelerating demand for technology, consumer products, infrastructure, health care and education creates new revenue streams for companies that meet those needs. However, the economic and political uncertainties in EMs can produce unwelcome volatility for investors. There are ways for investors to incorporate emerging markets exposure into their asset allocations while potentially dampening the risks associated with EM investing. The question facing investors is whether emerging markets should be considered a tactical component or core holding within their asset allocations.

tgeno

Thanks for the link. Good read. EM funds have long been a core holding of my portfolio. This global economic malaise will not last forever, and I handle the volatility with patience.

MaxBialystock

Ya, what tgeno said. Ditto. Though we are in a new normal. Profits will not be as juicy as yesteryear.

BobC

I agree with tgeno. We use EM funds for most client accounts, except for only the very conservative ones. How one employs them can be varied, but for the most part, established funds like ODMAX offer "relatively" good risk/return. We also like Wasatch WAEMX for more diversification. We have used a few regional funds, too, but these can have some volatility that many individual investors find unacceptable. At some point, I would expect EM volatility to be lower than it has been over the last 10 years, but that seems to go with the territory. Keep in mind that Korea, Taiwan, and some others were considered EM at one point. Even though they are the mainstays in most EM funds, their economies are clearly NOT emerging market status. We may say the same for Brazil, China, and Russia in the next decade.

kevindow

Hi Kenster,

Thanks for the very interesting link.

I agree that population pyramids favor growth in EM over developed economies going forward, and that investing in companies that serve EM consumers is the best play as EM middle classes ramp up consumption.

However, economies with higher economic growth (GDP) do not necessarily produce higher stock returns as discussed here:

http://www.brandes.com/Institute/Documents/Case for Emerging Markets 071105.pdf

Kevin

BobC

Reply to @kevindow: Great paper by Brandes, Kevin. My take away from this (and from all of Brandes' research) is that they are, have been, and always will be deep value players. Nothing new here, since that is their legacy. For me, this does not mean they don't like emerging markets, only that their approach to investing in EMs is consistent with their other funds. And who can argue their long-term numbers. Unfortunately, their EM fund is only available in institutional class shares with a $100,000 minimum. So most folks must look elsewhere.

Kenster1_GlobalValue

Reply to @kevindow: Thanks for that Brandes paper - yes I have seen that one in the past and from time to time I like to read their articles.

Now, what I get out of that paper is that Brandes isn't avoiding EM (in fact they have an EM fund) but that they still like the opportunities in many of the EM countries but that they are seeking the more value-oriented companies in the EM countries. Seeking the most value-oriented companies in hot EM growth countries? Sounds reasonable to me.

Also, the research that is most often referenced and conducted by the professors looked at returns over the really really long term like 50-100 years. That doesn't mean that there can't be 5, 10 and 20 year opportunities to do well in fast growing countries. The last 12 years was fantastic for many/most countries in Emerging Markets --- for example: the Aberdeen Indonesia CEF has a 10-year annualized return of 26% !!!

So these fast-growing countries the past 10-12 years have done awesome! And the many Matthews Asia funds have done quite well too.

If these countries sported wonderful GDP growth but outsized performance - doesn't that contradict the papers citing non-correlation between GDP growth and stock performance? Again, that paper looked at REALLY long-term returns AND it also never considered VALUATIONS.

One of the reasons why EMs were still able to have outsized performance despite strong GDP growth was because 12 years ago their valuations was in the dirt-cheap bargin basement --- it was a clearance sale!

Furthermore --- the Paper by the Professors did not show a uniform scale of higher the GDP growth, the lower the stock returns. In fact, their paper showed that the countries with middle-of-the-road GDP growth had the highest stock returns, higher than the slower GDP growth countries.

So one of the things that investors have to realize and extract from that paper is that although they show that over the very long-term, the highest GDP growth countries do not translate to the highest stock returns BUT it also doesn't mean that the slowest GDP growth countries sported the highest stock returns. In fact, the highest group of performing countries were those that sported middle of the road GDP growth.

So you can still do very well with attactively valued companies in strong middle of the road GDP growth countries over the long-term.