Emerging markets seem to be gaining popularity these days when it comes to the “next big thing” for investors. The reason for this is very simple: emerging market equities have come down in value significantly from their recent highs, leaving investors asking if its time to jump in and buy to profit.
Take a look at the equity market in India, for example—the country is considered as one of the biggest emerging markets. The India Bombay Stock Exchange 30 Sensex Index is down more than 10% from its peak in late July. Please look at the chart below to get a more precise idea:
Chart courtesy of www.StockCharts.com
India isn’t alone; stocks and key stock indices in other emerging market economies are in very similar conditions, if not performing worse. China’s stock market is lagging, Indonesia’s has recently plummeted, and the Brazilian equity market continues to show dismal returns.
Before adding companies involved in emerging markets or buying an exchange-traded fund (ETF) that gives them exposure to those economies, every investor should ask themselves: does the stock market declining in value really mean there’s value—or, in other words, an opportunity for profit?
The answer: not necessarily.
Investors should consider that emerging market economies are sometimes relied on by developed nations to buy their products, because they can make them at cheaper rates. So if the developed markets start to see some sort of economic slowdown, the emerging market economies could see ripple effects. This may just be one of the phenomena driving the stock markets in those countries lower.
The developed nations in the global economy aren’t showing robust growth. For example, the U.S. economy isn’t growing quickly and nations like Germany and France are facing issues regarding the eurozone crisis.
As evidence, note that we have seen China show concern about demand in the global economy and the country’s exports subsequently declining—it has been losing exports from the eurozone. This year, the country is expected to grow at a much slower pace than its historical average.
What does this really mean for investors?
For investors who are looking for short-term profits, they need to be really careful. The stocks in emerging markets have fallen in value, but they may very well go down further. If they plan to jump in, investors really need to have their stops in place and know exactly the amount of losses they are willing to take. Things can turn even more anemic—emerging market stocks usually have higher volatility than those in the developed nations.
For investors who are looking to invest for the long term, they may find some value in the emerging markets. That said, it doesn’t mean they should forget all their portfolio management techniques and overexpose their portfolio with emerging markets.
To profit from fluctuation in the stock markets of emerging economies, investors may want look at ETFs like the iShares MSCI Emerging Markets (NYSEArca/EEM). It provides them with diversification and exposure to different emerging market economies.
~ by Mohammad Zulfiqar, BA
This article was originally published at Daily Gains Letter