Emerging Markets Investments

Emerging Markets in Comparative Perspectives

To avoid American tariff turmoil, stock investors could turn to Developed Markets in Europe, but since the 1990’s regulated European productivity has grown at roughly half American rates, largely due to our high-tech startups.  Investment capital is scarcer and energy prices higher.  Developed “Europe does not have a risk culture, and it’s a big problem,” writes The Christian Science Monitor.  

Bypassing North Korea, the highest-risk “frontier markets” in places like Bangladesh, Estonia, Kenya, and Vietnam face liquidity risks, poor information, and nationalization.  Before 2011, Frontier markets correlated 0.56 with the S&P 500 while Emerging Markets had a 0.823 correlation—but Trump will likely increase differences with more vulnerable Emerging Market countries.  For volatile, affordable stocks with higher growth prospects and acceptable risks, diversify with Emerging Markets. 

Three indices define Emerging Markets nations:  S&P, FTSE, and MSCI.  China, South Africa and Korea dominate half of 24 markets which span a third of the globe and two thirds of its population.  These nations are clearly urbanizing, developing infrastructure, stabilizing politically and showing some respect for property rights.  Wealthy in natural resources but short in discretionary income and education, expect larger materials and energy sectors, low levels of per capita income (Indonesia’s was one twentieth of America’s) and relatively poor financial reporting.  But their average economic growth of 4.4% between 1984 and 2009 beat Developed nations’ 2.9%.  Higher growth suggests investment promise according to Fisher Investments on Emerging Markets.

For good emerging markets investments, start with Asia.  Nationalist political movements are stronger in Africa and Latin America, threatening foreign investment and destabilizing currencies to give out unaffordable social benefits. Yet Asians often save more than westerners and respect property rights with weaker environmental and labor laws.  Government-business alliances give moderate tariff protection and subsidized loans for corporate growth.  Consider two emerging nations squabbling over oceans.

China:

With a strong, well educated, professional class consuming well and ruling relatively cheap labor with light environmental and labor regulations, China is the behemoth of Emerging Markets and the workshop of the world with R&D and venture capital second only to America.  China devours industrial metals to make laptops, phones, solar panels and electric cars. “Exports rose from $52 billion in 1989 to $1.2 trillion in 2007” and, writes Fisher Investments, imports rose as China invested prodigiously in roads and railroads while promoting its Silk Road abroad. Expect service sector and environmental enhancements.

China survived Mao’s famines to rebuild stock markets, but politically anxious oligarchs hoard two thirds of most companies.  Chinese can’t invest abroad and bond markets flounder, so investments get bottled into real estate speculation or gold.  Economics gets lost when  “China’s Ministry of Railways maintains majority control over all rail tracks, setting rates for farm products and ticket prices for migrant workers at artificially low prices to appease the vast rural population.” (Fisher, p. 38). The Chinese government retains control of banking, law, journalism and Internet communications.  The security apparatus lowers returns and political risk is great if government errs.

The Philippines:

Beating China’s 5.2%, the Philippine economy grew by 5.6% during 2023, following expansions of 7.6% in 2022 and 5.7% in 2021, buoyed by strong domestic demand.  The Philippine archipelago, located on international trade routes, boasts the third best geothermal resources in the world, Asean free trade, and electronics manufacturing.  Half the people speak English, allowing nurses, caregivers and teachers (like my wife) to work phonebanks or send remittances from abroad.  Balance this against corruption, “onerous government fees and taxes” and a “lack of predictability in government services/approvals”.  With a 20% corporate income tax and 75-year land leases, government maintains democratic support with investment promise.

Risk Culture:

Morningstar admits that Emerging Markets stock underperformed American stock in the last fifteen years but suggests this may change because of weaker American performance and stronger Asian earnings with clean energy transitions lead by basic materials suppliers and makers of electric vehicles and solar installations. Short run, emerging markets are more vulnerable in tariff wars/  Eschewing broad index funds, investors should peruse the Heritage Foundation’s Index of Economic Freedom for details on strong ties between freedom and progress abroad.  Consider stability, peace, labor laws and property rights alongside “risk culture.”

Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. ​ He serves mostly Santa Cruz Mountain dwellers. ​ These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. ​