Will investing in Emerging Markets provide a comfortable retirement and more financial security?
The newsletter is at: http://tinyurl.com/bfm-em-2014-web
Emerging Markets have:
. A growing middle class and domestic consumer
. A young and growing population
. Stocks that are not expensive
. High growth rates
. Low debt
In summary, portfolios with a portion invested in EM may be good strategy to reach long-term goals.
If you grew up during the 1970s and 1980s, you were used to seeing "Made in Japan" imprints on many toys and household items. Later, "Made in China" emerged to be the new norm. Today, the prevalence of emerging economies is widespread.
As a global investor, BFM acknowledges that emerging markets cannot be ignored.
Following the great performance of the S&P 500 of more than 200% (total return) since March 2009, we are no longer bullish on U.S. stocks (see June 2014 charts).
Home country bias is a universal tendency for people around the world so U.S. or French investors are no different; they are prone to emphasize U.S. or French stocks in their portfolios. After all, the companies behind these stocks are more familiar. The last few years, the U.S. economy fared much better than many others, and the U.S. stock market has performed very well.
In contrast, global diversification has been touted as a superior strategy for equity investors because investing in stocks in many markets around the world, reduces the concentrated risks of investing in one market alone.
Thirty years ago, EM made up just 1% of the world equity market capitalization compared to 11% in 2013 (which may be underestimated). They comprise 51% of world economy (GDP on a purchasing power parity basis), representing 82% of global GDP growth and more than 80% of the world population. They are in better shape today and are less risky than during the past crisis. EM are already too important to ignore and they are a good source of diversification for portfolios. We understand that in a roaring stock market, our philosophy of "prudent diversification" can be challenging. Here is a good insight from one of the greatest investor:
"The only investors who shouldn't diversify are those who are right 100% of the time."
Sir John Templeton
At BFM, we believe the fundamental long-term investment case for EM is good.
There are many reasons to be optimistic about EM. Many countries have sound macroeconomic, financial, and policy fundamentals. Other positives are the urbanization, industrialization, strong economic growth, catch-up growth from low per capital income, companies that have better profitability and higher dividend per share, a good demographic (for most of EM countries), a more stable middle-class, and the rise of a consumer society. We believe these good fundamentals will serve investors well in the long run.
By 2030, middle class spending is expected to increase six-fold in the Pacific region. The number of millionaires in China already passed the one million mark in 2010. The number of billionaires is expected to grow more than 80% in China, 63% in Russia, 67% in Brazil and 36% in Turkey.
We saw a massive structural shift in credit standing during the last decade.
EM are actually creditors to the rest of the world. They hold nearly 80% of global foreign exchange reserves.
Potential risks include volatility, inflation, currency, and political risks. Also, the unwinding of Quantitative Easing (monetary policy to stimulate the U.S. economy) could result in a stronger dollar. China is experiencing a slowdown. Furthermore, EM experience more corruption and less transparency. Despite all this, we believe the emerging markets remain an attractive source of mispriced opportunities and that some mutual funds managers are best suited to exploit these inefficiencies.