• Print
  • Default text size A
  • Larger text size A
  • Largest text size A

7 reasons to buy emerging-market stocks

  • By Brett Arends,
  • MarketWatch
  • – 01/28/2014
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.

They say the time to buy is when there's blood on the streets.

Well, in emerging markets, it's there now.

From São Paulo to Seoul, and from Mexico City to Moscow, the rivers of ink are flowing red and investors are panicking.

After last week's rout, the MSCI Emerging Markets index is down about 4% so far this year, and about 10% over the past 12 months. Russia's down 5% since New Year's Eve, South Korea, 6%, and Brazil is in free fall, down nearly 10%--in less than a month.

Bank of America Merrill Lynch says that U.S. investors have now yanked money from their emerging-market stock funds for 13 weeks straight—the longest such stampede since 2002. They've been pulling money out of emerging-market bond funds for 17 weeks straight.

Using MSCI data, I compared the prices of the emerging markets and U.S. stock indexes going back 20 years. The slump in emerging markets, combined with last year's boom on Wall Street, has left emerging markets at their lowest valuation level, in relation to the U.S. market, since 2005—and well below the 20-year average. Emerging markets would have to rise about 20%, in U.S. dollars, to get back to their modern-day average relative level.

In other words, while U.S. stocks have been getting more and more expensive, their counterparts in the developing world have been getting cheaper and cheaper.

The Brazilian stock market now trades at barely 10 times forecast earnings, according to FactSet. It sells for less than one times annual sales, and sports a dividend yield above 4%. Stocks in Turkey are less than nine times forecast earnings. South Korea is below 10 times forecast earnings. These are inexpensive levels by historic standards.

And American stocks? They're trading at 15 times forecast earnings.

Curiously, according to MSCI data the small-cap stocks in emerging markets have held up much better (so far) than the large-company stocks. Typically small-cap stocks are more volatile, rising further on the way up and falling further on the way down.

A hypothesis: The collapse in large-cap stocks shows the outsize influence of western investors buying into these markets through mutual funds and exchange-traded funds. Such funds typically invest mainly in large caps. So if U.S. investors are all dumping their emerging markets funds, those funds are being forced to sell all their (large-cap) holdings, driving down the price.

Should you buy?

The nervous Nellies will tell you that emerging markets may fall further. Perhaps they are right. BofA Merrill Lynch strategists believe that redemptions of emerging markets mutual funds have not yet hit "capitulation" levels.

But there again, they don't know for certain. No one does.

But here is what we know for certain:

  1. Emerging-market stocks are now relatively cheap, while U.S. stocks are relatively expensive.
  2. Historically, the most successful investment strategy has been to buy what's cheap and sell what's expensive.
  3. Stocks are super-long-term investments, so what really matters is not what is going to happen next month or even next year, but what is going to happen over decades.
  4. Mom-and-pop U.S. investors, who have a long track record of buying and selling stocks at the wrong times, are heavy sellers of emerging-market stocks.
  5. Money managers, who loved emerging-market stocks when they were expensive two years ago, now hate them.
  6. "Emerging market" economies are not a fad. They account for a large and growing percentage of the global economy. According to the International Monetary Fund, they now account for about 40% of the world's gross output when measured in U.S. dollars—up from less than 25% a decade ago.
  7. Emerging markets generally are under-represented in the "global" equity indexes. Bank of America estimates emerging market stock markets account for just 10% or so of the world's stock markets by value.

So even if you are not trying to "time" the markets, and you just want to maintain a portfolio of stocks with the maximum diversification, you should include a hefty dose of emerging markets stocks in that portfolio. And if you haven't recently "rebalanced" your portfolio, simple logic says you should take some of the profits from your booming U.S. stocks and use the proceeds to buy some more emerging markets stocks. And to hell with the scary headlines.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
Copyright © 2014 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Links provided by Fidelity Brokerage Services

fidelity-fbs-iconThese links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are seperate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Published by Fidelity Interactive Content Services

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
fidelity-fbs-iconThese links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are seperate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.