Why invest in emerging markets today?
Financial markets/economy
Posted by MoneyController on 28.11.2024
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Over the past five years, emerging markets have underperformed more advanced markets, but there are those who believe that undervalued stocks can be found in this large market segment.
In the financial market race, emerging markets have lagged behind. As Spencer Jakab points out in the Wall Street Journal (WSJ), looking at the MSCI index, global equities have been growing at a rate of 12% per year over the past five years (US equities are up 15%), while emerging markets have only been growing at an annual rate of 4%. Jakab writes that this divergence is explained by the fact that a) the global MSCI is 65% composed of the US financial market, b) the emerging markets index has been adversely affected by China's recent difficulties in attracting investment capital.
The result of this situation is that emerging markets - which had grown in the first decade of the 2000s, partly thanks, Jakab explains, to rising commodity prices - now contain large portions at a discount to more advanced markets. These are countries that, as the WSJ article shows, are characterised by both problems and potential. This is the case in Mexico, for example, which could benefit from the shortening of US supply chains and in which President Claudia Sheinbaum is tackling the terrible drug cartels.
Other countries have contradictory aspects, but perhaps the point, Jakab explains, is that the very label of emerging markets is often misleading: just think of the fact that countries like Taiwan and South Korea have more wealth per capita than countries like Greece or Portugal. In general, one goes on to read in the WSJ, being part of them or not can create problems when evaluating investments (this is the case of Israel, which has lost visibility after being included in the more general stock market index of Europe and the Middle East).
The conclusion Jakab comes to is that the low prices of emerging markets could turn to one's advantage: they could be a good entry point for those investors who believe that (partly because of the emerging markets label) those stocks have room for growth.
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