Investment Opportunities

Satisfy Your Wanderlust by Investing in Emerging Markets

Each winter, my wife and I take our kids out of school for some time to explore the world.

These family trips are precious to us. The memories are priceless, and we are such a tight-knit crew in large part because of them.

And, of course, escaping the temperatures of negative 30 degrees Celsius that we suffer up here in Manitoba, Canada, during the winter isn’t half bad either.

The kids love the trips and do their part by keeping up with their schoolwork. In fact, when they get back to school, they are always ahead of their classes.

With my oldest now in grade eight and with more school obligations, this year was probably our last chance to take one of these winter adventures – yet another thing this pandemic has ruined.

I’m sure a lot of readers have also had to forgo winter travel plans…

So in lieu of our trips, I’m thinking we should take our portfolios somewhere new. The data suggests that we may be rewarded over the next several years if we do…

Emerging Markets Look Set for a Period of Outperformance

Stock markets are cyclical beasts.

  • Growth outperforms value, and then the cycle reverses.
  • Large caps outperform small caps, and then the tide moves in the other direction.
  • U.S. stocks outperform global ones, and then the money swings the other way.

As investors, we can ride these cycles up and then move out when another area of the market offers a better opportunity.

I see such an opportunity for us today.

Over the past decade, U.S.-listed stocks have vastly outperformed stocks from emerging markets.

A Cycle of Outperformance

While the S&P 500, as represented by the SPDR S&P 500 ETF Trust (NYSE: SPY), has doubled over the past 10 years, the iShares MSCI Emerging Markets ETF (NYSE: EEM) hasn’t even increased. In fact, it is down 1.03%.

The strong U.S. dollar and concerns over international trade have been a wet blanket on emerging market stocks for a long time.

The result is that emerging markets now offer much, much better value than U.S. stocks. I believe that emerging markets are poised to be one of the best investments over the next five years.

On a trailing price-to-earnings basis, the MSCI emerging markets trade at 15.61 times earnings.

The S&P 500, meanwhile, trades at 31.74 times earnings. That means U.S. stocks are twice as expensive.

At some point, valuation matters – and we are getting pretty close to a turning point. When the stocks you buy are cheap, you don’t need those companies to do a lot of good things to see the stock market reward them.

The next several years should see emerging markets outperform as the cycle turns and the U.S. dollar weakens or stays the same.

To be clear, I’m not saying that investors should go all in on emerging markets…

I am saying, though, that now is the time to start getting more exposure to these low emerging market valuations before the momentum turns in the favor of these stocks.

Good investing,

Jody


About

Jody Chudley is a Contributing Analyst to Wealthy Retirement. He is a qualified accountant with two decades of experience in the international banking and hedge fund industries as a financial analyst.
His background in finance has made him an expert in deciphering financial statements and uncovering deep value and income opportunities. He has written for various websites and financial magazines with a focus on the resource sector and contrarian investment opportunities.

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