Wednesday, February 21, 2018

29195_14365104130183_0The first half of 2017 has seen exchange-traded funds investing in stocks from developing nations as Brazil, China, India, Mexico and Russia have taken in $10.5 billion in new money. With $127.8 billion in total assets, one-twelfth of all the money in these funds has come in over the past 90 days.

Much of that, presumably, is in hot pursuit of high recent returns. Emerging markets are up by 12.4% this year — double the return of the S&P 500 index of U.S. stocks, counting dividends.

Investing in emerging markets isn’t a bad idea, but rushing to do so is. The stocks of industries in emerging markets aren’t so much absolutely cheap as relatively cheap — especially when compared to the U.S. companies, which still are hovering near all-time highs.

The MSCI EAFE, a benchmark for foreign developed markets, is expected to grow earnings 8% annually over the next five years. SPDR S&P 500 ETF (SPY), tracking the U.S., has an estimated five-year earnings growth of almost 9%; whereas the emerging markets are projected to grow earnings faster than developed markets over the next five years. Emerging Markets Index, a benchmark for emerging markets, has projected a five-year earnings growth rate of almost 10%.

The US economy is like a supertanker or a sailboat. It is not easy to turn it around and come back to where you have been in terms of prosperity. In general, Mr. Trump’s policies will fail to lift the economic growth rates significantly. US stocks, compared to emerging markets or European companies or Japanese stocks are significantly ahead of themselves. In 2017, emerging markets will outperform the US either by going down less than the US or by going up substantially more than the US. So economists essentially suggest investors avoid the US and rather invest in emerging economies including India.

Secondly, recently investors have been obsessed with growth in the United States because the Fed declared that they would essentially increase the Fed fund rates three times this year but in the US, the Treasury bond market is grossly oversold and for the next three months, we can have a rebound in US treasuries. Short-term and long term interest rates in the US are going to ease again in the next three months. You could get the 5% to 10% ups.