Matthew Benjamin on Investing in Developing Countries
Samuel Taube: Joining us today is Matthew Benjamin, the new Editorial Director of The Oxford Club and a former consultant for the World Bank. Today we’re talking about all the bullish sentiment around emerging market equities.
Matthew, thanks for joining us.
Matthew Benjamin: Good to be with you, Sam.
ST: When you’re reading about emerging markets, you come across a lot of different terminology. And I thought we could start by briefly defining some of these terms: “emerging markets,” “developing nations,” “frontier markets” and “least developed countries.” Are these all the same?
MB: Well, not quite. Several of these terms are interchangeable. When we refer to emerging market economies, we’re generally talking about nations with low to middle per capita income levels. This is compared to so-called advanced economies – the U.S., Canada, Western European nations and Japan, for example.
Yet “emerging” doesn’t mean small. The size of these economies can be enormous. China, for example, is the world’s second-largest economy, but it’s also an emerging economy because of its income level. And China is a huge piece of the emerging market story.
Brazil is another good example here – very big country with a lot of great investing opportunities. So those two terms – “emerging markets” and “developing nations” – are somewhat interchangeable.
“Frontier markets” is a little bit more specific. It’s usually used to describe a subset of emerging market economies. These countries are typically poorer than the average emerging market nation, but they are also growing and still present investing opportunities (or often do). Botswana, Ukraine, Nigeria and Vietnam are a few examples of these kinds of markets.
And lastly, you mentioned “least developed countries.” These are the world’s poorest countries. Many of them – most of them, really – are in sub-Saharan Africa. A few are outside there, like Afghanistan and Haiti.
Many of these nations are also what the World Bank would call “fragile and conflict states.” That’s because there’s often ongoing violence or civil war, or possibly a government that could collapse at any time. As I said, Afghanistan would be a good example of this. These nations are not investment opportunities. Or not at present, at least.
ST: I see. A few years ago, it seemed like many emerging market funds were severely underperforming our stock market. And now the opposite is happening – they’re largely outperforming our markets. What are some of the forces behind these trends?
MB: Well, clearly they’re outperforming because there’s a lot of interest in these regions and countries and stock markets right now. Many of these economies and stocks are closely linked to global commodity prices, like oil, metals, those kinds of things. And they were hit very hard when the commodity supercycle ended in 2014 and the price of oil and other commodities dropped dramatically.
But demand for oil and other commodities is now coming back, as you probably know, and these stocks are cheap, especially compared to U.S. stocks, which are very expensive right now.
Let me say a word about that. The total market value of all U.S. stocks is more than 143% of GDP right now – that’s more than double the average value of the last 65 years. According to Warren Buffett, the famed investor, anything over 100% is overvalued. So we’re way overvalued right now by many measures.
And this brings us back to emerging markets. They look very good in comparison, very well-priced.
I also want to add that many of these countries – think of Mexico, Argentina, Asian economies – experienced a major financial crisis in recent decades. In reaction to that, many of them – again, Argentina and Mexico are great examples here – put in place new measures that should help them going forward to avoid or mitigate similar problems.
The kinds of things I’m talking about are flexible exchange rates, smarter regulations and additional currency reserves. These things are not just good to prevent and avoid disasters going forward – but they’re also good for these economies in terms of growth and productivity.
And as you well know, our Chief Investment Strategist Alexander Green likes to point out that emerging markets account for three-quarters of the world’s landmass and 85% of the world’s people. Consumers in these nations want everything you and I here in the West take for granted, from cars to housing, healthcare, consumer items, you name it.
And if you as an investor want to benefit from this amazing growth story going forward, you need to have part of your portfolio in these markets.
There’s an index that tracks emerging markets that is widely watched. It’s called the MSCI Emerging Markets Index (NYSE: EEM). It follows 24 emerging market nations, including five in Latin America, 11 in Europe, the Middle East and Africa, and nine more in Asia. This index is up 25% this year, and it seems poised to keep rising.
ST: Indeed. So in your view – obviously not all of these emerging markets are created equal – where are the most exciting investing opportunities right now and why?
MB: It depends on whom you ask, but I would say that some of the ones that investors are really excited about are China, India, Indonesia and Mexico. So those are four from four somewhat different regions. All of these countries present very bullish stories for investors. There’s good growth, good economic fundamentals, stability and of course bargains on stocks, as we mentioned before.
Mexico’s economy has posted better-than-expected growth this year, and the Mexican peso is very strong. Indonesia and India have seen very strong productivity growth, which is always a good sign for the future of an economy and a stock market, and the firms within that economy.
And then everyone knows China’s growth story, which has been the economic, global story of the past few decades, and it will continue to be so.
ST: I see. So how risky are some of these investments?
MB: That’s a great question, Sam. I’m glad you brought that up. There’s certainly risk involved, and nobody should have any illusions about that.
With any emerging market investment, you’re taking on risks that are not so common with investments in advanced, or wealthy, economies. These risks include political instability, a lack of regulation and transparency, currency fluctuations, and others that I can’t even name.
When the price of oil fell in 2014, for example, Nigeria’s and Russia’s stock markets and economies were devastated. Certainly in Russia, the stock market is very closely tied to the price of oil.
So the point is, while there’s risk involved, many investment strategists – including our own at The Oxford Club – feel that the yields in many of these countries are so attractive that they are worth the slightly higher risks that you assume.
ST: I see. And you mentioned that there are some economies that have structural problems from being tied to a single commodity. On that note, are there any emerging markets that you would stay away from right now, and why?
MB: Absolutely. Any investor interested in this opportunity has to keep in mind that not all emerging markets are the same. They come in many different varieties with different problems, different opportunities…
Some are very attractive, and I mentioned a few of those before. But some are certainly to be avoided.
Venezuela is a good example. At one time it was a promising destination for foreign capital.
ST: Right, not that long ago.
MB: Exactly right. But now you wouldn’t want to get near the place with your money. Russia also raises some concerns. Oil prices rising again are good for that country, yet political tensions with the U.S. are a potential problem. They raise red flags for anyone looking to invest there.
So the point here is to be selective. There is a wide variance in emerging market stocks; you want to look for the good ones.
ST: I see. So how do you recommend the average investor go about investing in emerging markets?
MB: I think a smart way to start in this is to find a fund that works for you.
Alex Green has been recommending the Vanguard Emerging Markets Stock Index Fund (VEIEX) since 2003. This fund holds more than 4,600 emerging market stocks and is concentrated in big markets like China, Taiwan, India, Brazil and South Africa. Last I checked, it’s up 23% this year.
Another fund Alex likes a lot, I think, is the Templeton Emerging Markets Fund (NYSE: EMF). I think he’s been recommending that one since 2002.
ST: Yup, a good 15 years now.
MB: Exactly right. That fund mostly holds equities in Asia, including Taiwan, China, South Korea, Thailand and Indonesia. It’s also in Brazilian and Russian stocks, to be sure. Some of the sectors it invests heavily in are banking, software, automotive and energy. That fund is up 36% year to date. So very impressive.
And you can see the overlap in the countries that these funds invest in. That’s not a coincidence. If you remember, back in the early 2000s, we saw the emergence of an acronym called BRICS.
This stood for Brazil, Russia, India, China and South Africa. These were the major emerging economies at the time. Those economies and those opportunities are still very popular with investors – perhaps Russia a little less so.
And as you can see from some of the other nations those funds are invested in, emerging market investors have branched out a bit and are looking out for opportunities in new countries, frontier markets and different sectors. So that’s a good way to start, I think, if you’re looking to invest in emerging markets.
ST: Yeah, seems pretty easy. There’s only one instrument involved or a couple of them.
So how would you sum up your view of emerging market equities right now?
MB: In sum, Sam, emerging markets – or at least some of them, not all, let’s remember that – some are very attractive right now. In many cases, they present good growth stories, tolerable risk profiles and very good potential yields. With U.S. stocks as expensive as they are right now, all investors should include emerging market stocks as part of their overall portfolios.
ST: Good advice. Thanks for joining us, Matthew.
MB: Sure, anytime.
ST: If you’re interested in learning more about the best emerging market investment opportunities right now, check out the latest research from The Oxford Club’s Macro Strategist Eric Fry. You’ll find a link to that at the bottom of this transcript.