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Michael Schaab, CA CFA, is a vice-president and portfolio manager at Leith Wheeler Investment Counsel Ltd. in Vancouver. The article is not intended to provide advice, recommendations or offers to buy or sell any product or service.
With fewer analysts and investors in the mix, the chance of finding undervalued investments is greater
Emerging markets are often touted in investment circles and the business media. Yet many investors are unsure of how to invest in emerging markets, or even whether they should. These markets are alluring but can be mysterious, misunderstood or simply difficult to access.
With a prudent strategy, however, emerging markets can strengthen an investor’s portfolio. Before adding exposure, investors should understand the tenets of emerging-market investing, its risks and rewards and a proper approach to investing in them.
So, what is an emerging market? It’s a country or region that is less developed financially and economically than “developed” markets. Meanwhile, its economy is growing rapidly. The largest emerging market economies are known as the “BRIC” nations, an acronym coined by economist Jim O’Neill to describe the world’s highest-growth countries: Brazil, Russia, India and China. These four countries averaged 7.1-per-cent GDP growth over the past three years, while the world GDP growth averaged two per cent for the same period.
Often, less-developed emerging markets, such as Argentina and Vietnam, are referred to as “Frontier Emerging Markets” to emphasize their even higher risk-reward characteristics.
Economic growth should not be the only factor when considering emerging-market investments. Let’s look closer at the pros and cons of investing in these markets.
The most common argument for investing in emerging markets is that their expected high growth rates should help boost growth in earnings and cash flows for companies that are part of those economies. However, exposure to emerging-market economies does not guarantee above-average earnings growth. The company’s financial condition need to be improving and its products or services still need to be successful, so understanding the investment’s fundamentals is always crucial.
Other important reasons for investing in emerging markets include diversification and better investment prices. Diversification implies your investments won’t all behave the same way at the same time. For instance, if Canadian equity markets are flat, emerging-market stocks may be on the rise.
Better prices are found when there is less investor attention and analyst coverage; in that environment, stocks have a greater potential to be mispriced. Emerging markets attract fewer investors and analysts, so the chances of finding undervalued investments are greater.
The cheaper your financial investments, the more likely they are to provide positive investment returns over time. For example, Korean-based and listed POSCO was recently ranked No. 1 among the top 35 steelmakers worldwide for innovation, productivity and profitability, among other criteria, by World Steel Dynamics, a U.S.-based steel information service.
For the rest of this column, please go to the Vancouver Sun website: http://www.vancouversun.com/business/emergingmarkets/Opinion+Emerging+markets+offer+risk+also+reward+investors/7164162/story.html