Oil crisis in Russia. Bad debts in China. Impeachment proceedings in Brazil. Emerging markets have plenty of issues to navigate, but a closer look shows that much of these concerns are already baked into the stock prices, perhaps overly so.
Emerging markets present attractive long-term growth opportunities generally not seen in developed markets: Younger demographics, a growing consumer base with rising wages and debt-free balance sheets, and government policies that are opening up countries to outside investors.
But emerging market stocks have lagged their developed market counterparts badly in recent years. Since October 2010, emerging markets have declined 6.0% annually while U.S. large cap stocks (as measured by the S&P 500 Index) have gained 10.0% per year. The last time emerging markets lagged this much was when the U.S. went through the 1990s tech boom:
Investors have surely noticed the recent volatility in the global market place. In the first few weeks of 2016, we have experienced very volatile markets both domestically and internationally. The catalysts of the global sell off have been the volatility experienced in the Chinese markets and the plunging price of oil.
On top of the China’s current economic issues, devaluation of the yuan has added angst around the globe. Although China’s economy is the second largest in the world, its stock market represents a fraction of the global equities market. Investors need to remember that China equity falls are more correlated with short-term psychological factors rather than the underlying China economic conditions.