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Understanding Emerging Markets

What Are Emerging Markets?

First, let’s start with a disclaimer – what follows is NOT investment advice/guidance. Rather, it’s some thoughts and perspectives on an investment asset class that sometimes scares and confuses people.

Way back when I started investing, my portfolio consisted of 50% in the S&P 500 index, 25% in REITs and 25% in emerging markets. I chose this mix as (i) I wanted to take advantage of the US economy (hence the S&P), (ii) I did NOT want to own real estate directly BUT did want to participate in the real estate market (hence the REITs) and (iii) I wanted to take part in the incredible expansion that I believed would come in parts of the world that were emerging (hence the emerging markets).

While it’s a bit of a circular definition, emerging market funds invest in countries whose ECONOMIES are emerging. Some examples include Brazil, Russia, India, China and others.

Places where there are lots of people who want to raise their lifestyles to be more in line with what we are blessed with in the US.

Why Emerging Markets?

There are a couple of reasons in my mind. First, historically we have seen emerging markets have a higher than average (relative to all investment classes) return. HOWEVER, this higher than average return has come with MUCH more volatility. Also, with emerging markets there is always the issue of currency risk (i.e. the stocks do well but exchange rates “eat into” returns). Second, in my opinion, it just seems to make sense that the rest of the world is going to be “hungrier” than the US when it comes to economic growth in the future. I’m NOT suggesting that there is a lack of economic incentive in the US. Rather, I’m suggesting that we have been blessed in the US and many, many other nations would love to be as prosperous as we are. This, in my opinion, gives them a bit of extra motivation.

Why This Topic, This Week?

Some reading this might wonder why I chose this topic this week (and also wonder how I pick any topic on Fridays!). I write based on what I see/what I come across.

This past week the Economist had the following cover story:

Now this is NOT a rose-colored glasses story. Rather, it is more of a gloom and doom story wondering if China’s stock market has staying power. There’s 1.4 billion people in China.

That’s “BILLIONS with a B”.

I could be wrong, but I don’t think that China’s stock market (i.e. a form of measurement of the intellectual capital of the country) is going anywhere long term.

In the US we are EXTREMELY isolated from what goes on around the world. When you start looking, you see that economic activity in emerging market countries is massive!

Please don’t take the above as “advice to invest”. Rather take the above as a data point that underscores that the world is a very big place, that there are many less fortunate than those of us who live in the US, and those people are hungry to make a better life for their family. If that’s the case, I think you will see growth in these markets.

While there are no “guarantees”, I’m very confident that the emerging markets are going to do well – albeit with plenty of hiccups/bumps as you saw this past week in the press!

What’s the Message?

Simple. Pick your investment thesis and develop a solid Investment Policy Strategy (IPS) to implement. Yeah, I know I sound like a broken record. It’s something I’m proud of and have ZERO intentions of changing!!!


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Curt Stowers

Curt Stowers

Curtis Stowers helps individuals and families across the United States grow their financial assets, particularly in the Naperville, IL region. He is a Certified Financial Planner, holds a Ph.D. in Industrial Engineering from the University of Illinois, and is the founder of F5 Financial.