The No. 1 Reason to Invest in Emerging Markets Now


I like this.


Posted on October 19, 2010 by Chris Hunter

As any Wall Street old timer will tell you, the stock markets are driven by two powerful emotions: fear and greed.

Put simply, human beings naturally tend to pile into stocks during bull markets (greed) and rush for the exits in bear markets (fear).

You only have to look at the bubble in tech stocks in the late 1990s or the big crash in 2008 to know that neither of these emotions are very useful.

Greed-fueled investors who plowed their savings into stocks at the height of the tech bubble were wiped out when that bubble burst in 2000. Fear-driven investors also found themselves nursing big losses when they sold out of stocks in late 2008/early 2009…only to see the markets take off again in March 2009.

Understanding this knee-jerk behavior can help you profit over the long-run…particularly in the traditionally more volatile emerging markets.

You see, when you dig into the long-term historical trends, a very important pattern emerges: over the past 15 to 20 years, bull markets tended to last longer than bear markets around the world. Bull markets have tended to last an average of 69 months. Bear markets have lasted on average just 14 months.

As overseas investing guru Mark Mobius put it at a recent press conference in Kuala Lumpar:

If you take the long-term view of emerging markets, you will see that there are three bear markets, the Asian crisis (in 1997), second one was the dotcom bubble (in 2000), and the third was the recent subprime crisis. These periods had seen 30% or more declines in the market.

If you look at that, each of the bear markets is very short in duration while the bull markets are very large. When you summarize that, you will find that in all these periods since 1988, the average increase in bull markets was more than 423% compared to a decline of 57% in the bear markets.

The Secret to Investing Success: Learn to Ignore Your Fear

The lesson for globally-minded investors is clear: bear markets are no reason to panic.

Like it or not, bear markets are a fact of life. The secret to investing success is to be able to conquer your fear and learn how to ride it out. As Mobius points out, history shows that the upside is many times greater than the downside.

The point is this: fear of a correction in emerging market stocks is no reason not to invest in these high growth, high return economies. The emergings have been booming recently. But it is nothing like the real boom that’s yet to come.

You’re no doubt familiar with the arguments. In general, emergings have the following advantages over their developed counterparts (think the U.S., Europe and Japan):

1) Higher GDP growth rates
2) More attractive valuations
3) Lower public and private debt levels
4) Better demographics
5) More growth potential

But this isn’t the full story. There’s an even more compelling reason to invest now, whether or not there’s a correction at some point down the road.

Again, Mobius gave us a clue in his recent Malaysia press conference.

Most people are still underweight emerging markets as they don’t have enough to really represent the investment world. The differential leads us to believe that the potential demand for emerging market investments is likely to be significant.

What does Mobius mean? Simply that most investors have been too fearful of emerging markets to invest adequately in them. (“Underweight” is investor speak for allocating only a small amount of your portfolio to a particular asset class or sector.)

Last year, institutional investors – the market’s “big guns” – on average allocated only about 3% to 8% of their portfolios to the emergings. This leaves a heck of a lot of room for more money to flow into these markets, as these “big guns” play catch-up.

If you haven’t already, I strongly urge you to consider adding emerging markets exposure to your portfolio.

Sure, there’ll be ups and downs. There’ll even be more panics at some point in the future. But if you can keep your head about you while others are losing theirs, the rewards will be well worth it.


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