Actually, Now Is a Good Time to Enter Emerging Markets

by: FP Trading Desk November 30, 2008 | about stocks: EEM    

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Volatility in emerging market equities is at an all-time high, with the situation more unsteady than it was at the start of the millennium, when the sector was hit by the Latin American crises and the bursting of the technology bubble. While it may make some investors dizzy, rising volatility also presents opportunities for those looking to enter or exit the market.

Avoiding emerging markets altogether, even in the short term, can have a significant long-term opportunity cost, according to HSBC Global Asset Management. The firm’s research shows that missing out on just a few good days over the past decade can mean a big hit to returns. In fact, investors who missed out on the top 20 performing days for the MSCI Global Emerging Market Index (EEM), would have completely wiped out their gains of the past ten years. Being fully invested through that period would have produced an annualized return of 8.6%. Meanwhile, missing just the top ten days would lower that return to 2.2%.

When this trend is examined on a single-country basis, missing out on the best days has an even more adverse affect. Investing in Russia during the ten-year period would have produced a 22.5% return. But that number falls to -4.3% if the top 20 days are missed. In Brazil, those figures are 16% and -5.1%, respectively.

Like equity markets across the globe, slowing global growth and credit-related issues are hurting emerging markets. They are also bearing the brunt of geopolitical concerns, inflationary pressures, weaker commodity prices and a stronger U.S. dollar, according to Alex Tarver, global emerging product specialist at HSBC.

He said:

While there is clear evidence that investors are shying away from emerging markets, this is probably one of the most attractive entry opportunities for investors with a medium to long term view. Their volatility is likely to continue in the near term, but it pays to be fully invested rather than trying to time the market.

Mr. Tarver said emerging market fundamentals look sound for the medium and long term, with some corporate and sovereign balance sheets stronger than they’ve been in recent history. “Emerging markets are characterized by a large, young population, expanding labour forces and high saving rates that will drive long term growth,” he said, adding that inflation concerns are ebbing due to a reduction in food and energy prices.

Valuations have also returned to attractive levels following the sharp correction since the beginning of 2008, Mr. Tarver noted. The global emerging market universe is trading on a 2008 estimated price-to-earnings multiple of 7.8 times, he added, while earnings per share growth remains sounder than in developing countries.

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This article has 4 comments:

  •  
    Nov 30 11:02 AM
    Agree 100%.
    Especially the Alternative Energy Sector and the Shipping Sector.
    They are at the lowest ever, yet they have the most potentials to gain.
    Reply | Link to Comment
  •  
    Nov 30 05:48 PM
    Why don't you redo the numbers and tell us what would have happened if an investor missed the worst says instead of the best days? or missed both the best and worst. When I do the numbers I find more opportunity in avoiding the worst than capturing the best. and missing both is still better than being in for both.
    Reply | Link to Comment
  •  
    Nov 30 06:32 PM
    In fairness, why don't you tell us what missing the 10 or 20 worst-performing days would have done?
    Reply | Link to Comment
  •  
    Nov 30 06:37 PM
    "Investing in Russia during the ten-year period would have produced a 22.5% return. But that number falls to -4.3% if the top 20 days are missed."

    In the six months to 11/19/08, RSX lost 82%.
    Reply | Link to Comment
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