Third World equities (EMs) are "on sale" at relative prices cheaper than their 2008 to 2009 lows when compared with share valuations in Developed Markets (DMs).
Yes, there are problems in emerging markets. When has that not been the case? With all investments you must ask if the bad news has already been discounted. The five-year chart shown below says that it has.
The crash of 2008 took down EMs even more than it did investment-grade markets. The relative cheapness in late 2008 to early 2009 preceded a huge period of out performance that lasted through about April 2011.
EMs and DMs tracked pretty closely after that until this year. In 2013, the largest dichotomy between emerging and developed markets in quite some time has been created.
Less developed markets exhibited much higher growth over the past dozen years. EM shares delivered significant excess returns excess throughout most of that period.
Media pundits love to explain what’s already happened rather than try to predict the future. That way they can never be wrong. The New York Times took that approach a few weeks ago when they reported the 25% relative under performance of EMs through Aug. 23, 2013. Note: The lower chart and "Opportunity Knocks" was added by me, not the NYT.
Are EMs down for the count? Is this time really different? Only time will tell. Nobody was ringing a bell to get you into these stocks in early 2009. There is, obviously, no love for these stocks recently either.
Value seekers love that scenario. If emerging markets merely recover their standing and return to an equal valuation there are big gains to be made. Yesterday’s poor stock market performance begets tomorrow’s large gains.
I’ve been a buyer of the Vanguard FTSE Emerging Market ETF (VWO) as well as the Templeton Emerging Market Fund (NYSE:EMF) since they bottomed a few months ago. They provide fine diversification while tending to parallel each other as proxies for the entire EM universe.
Both charts understate total returns as they do not reflect the substantial dividend and capital gain distributions that each has paid out over the years.
When emerging markets heat up again potential gains are enormous. Value Line noted that EMF posted these total return figures for the five years leading up to the world’s financial meltdown.
The time to buy any financial asset is when others are willing to part with it cheaply. Emerging markets will have their day once again. This year’s weakness provides the chance to position for the future.
Disclosure: Long VWO, Long EMF
See more thoughts on value investing plus model portfolios here http://marketshadows.com/value-investing