The recent news regarding the emerging markets has not been good. Thus, the emerging market stock performance has also not been good. The MSCI Emerging Markets Index is the index that captures large and medium size companies (838 in total) across 23 Emerging Markets countries. For the year ending December 31, 2015, this index was down 14.92% (Net Returns). The same index has declined for the past three years.
Large market performance swings are common for this market. In 2008, the index recorded a loss of 53% which was then followed by the next 2 years with gains of approximately 79% and 19%. The key to investing in this volatile market is ensuring that you have an appropriate percent in this market of your overall portfolio and maintaining that percentage through the various market cycles.
The emerging markets are countries such as India, China, South Korea, Taiwan, Brazil and other countries in the midst of transforming their economies to lift more of their citizens out of poverty and into the middle class. This undertaking is well underway but will take several more years and decades to be fulfilled.
Example of some of the companies in this index includes Samsung Electronics in Korea, China Mobile and Bank of China, Infosys in India which is a global leader in consulting, technology, and outsourcing and Naspers in South Africa which is involved with e-commerce in multiple emerging countries.
The emerging market economies are still susceptible to global forces which impact their ability to generate earnings. There are many reasons for the current negative outlook for these regions, such as the decrease of commodities prices (such as oil) which has decreased the amount of money earned from these raw materials, and the overall global slow down.
However long-term investors need to view these markets for their long-term potential. One way to help investors understand how to view these investments is to look at how large international companies view these geographic regions. In October, 2015, it was announced that the world’s largest brewer by sales Anheuser-Busch InBev (AB) made an offer to buy SABMiller. The roughly $108 billion deal is currently pending Federal Trade Commission approval in the US.
Why would AB do so as the sales of SABMiller have underperformed other beer companies this year?
Look no further than the regions that SABMiller serves. Nearly 70% of its sales are made in China or markets reliant on commodities such as Nigeria, or the sub-Saharan Africa. While the emerging market issues are a real near-term concern, Anheuser-Busch is wisely taking a longer term view which is what all long-term investors should be doing. They are confident that these short-term factors will eventually give way to the long-term growth trends in these areas. The management wants to ensure they have exposure to markets such as Columbia, Peru and in Africa.
Emerging economies have been growing consistently faster than developed economies for the past 10 plus years. This trend should remain intact well into the foreseeable future. Emerging markets have an abundance of natural resources and the vast majority of the world’s population. Furthermore, unlike the developed world where populations are aging, the outlook in emerging markets is expected to be much more positive for future growth as populations are typically much younger and faster growing.
These regions and markets are where growth will be coming for many international companies. This growth will eventually be recognized in the stock performance of not only international companies but also the companies that are in these emerging markets like the companies listed in the index.
It can be hard at times for investors to maintain a long-term focus. It is essential that all long-term investors have the patience to allow long-term trends to play out. It won’t be long before the headlines once again discuss the strong performance of the emerging markets and pronouncing the incredible opportunities for these countries to help their citizens move into the middle class.
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