Should You Invest in Emerging Markets Today?
Morningstar.com readers discuss whether and how they're investing in developing markets.
In "What Market Experts Are Saying About Future Returns", Morningstar director of personal finance Christine Benz summarized long-run market forecasts from a range of well-respected experts. Most experts painted a dull picture for U.S. stock and bond market returns over the next several years. A few--including the research teams at GMO and Research Affiliates--expect emerging markets to be a bright spot. GMO currently forecasts (article requires login) a 4.0% annual real return for emerging-markets equities during the next seven years and a 2.6% real return for emerging-markets debt during that same time frame. Research Affiliates, meanwhile, now expects an 8.6% annual real return for emerging-markets equities over the next decade and a 5.6% real return for emerging-markets debt.
In light of these forecasts, we asked Morningstar.com readers what they thought of emerging markets today, and how they were getting emerging-markets exposure in their portfolios.
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'Biggest Value Play Available Right Now'
A few readers are actively buying emerging-markets stocks and bonds. "EM equities are the biggest value play available right now," says AllenG. "Anyone with more than 10 years left to invest should probably be overweight EM equities and local-currency bonds." AllenG holds AQR Emerging Multi-Style (QEELX) and First Trust Emerging Markets SC AlphaDEX (FEMS).
Academic has owned emerging-market stocks for a long while for diversification, but has been adding to the position due to relatively low valuations: "In the past I've had good results from buying out-of-favor asset classes like this. They do sometimes test my patience, though." DFA Emerging Markets (DFEMX), Lazard Emerging Markets Equity (LZEMX), Seafarer Overseas Growth and Income (SFGIX), and iShares MSCI Emerging Markets Minimum Volatility (EEMV) are among academic's dedicated emerging-markets holdings.
(Those looking to add to their emerging-markets stakes can find some recommendations in these recently published articles: "Morningstar's Best Ideas for Emerging-Markets Exposure" and "3 Choices for Those Expecting an Emerging-Markets Rebound".)
Sticking With What They Have--For Now
Other readers are eyeing emerging-markets stocks, but not yet adding to their existing positions. "They will probably be good investments at some point in time, but they're not going up while developed markets are languishing," says Racqueteer. "I would want good returns for putting my money at risk there, and I can't see that being the case for a couple/few years."
Chief K agrees: "I might boost my investments if emerging markets get screamingly cheap, but until then I'll stick with the modest amounts I've been investing for the past six or seven years."
"The biggest problem for me right now is country risk from the governments in EM nations," says retiredgary. "However, we are looking at beaten-down markets in more stable EM locations such as Singapore. We haven't done anything yet, but we are looking."
'Be in the Game' With a Dedicated Fund
Indeed, most readers maintain moderate emerging-markets exposure. "It's hard to ignore the demographic and economic shifts that are under way in the world right now--they are dramatic and unstoppable," writes palmreader, who keeps a 4% portfolio stake in a dedicated emerging-markets fund.
Says mckinm: "I still hold DFA Emerging Markets Value (DFEVX) in a 401(k) from my previous employer. I can no longer contribute to it so my current EM contributions are going into Seafarer Overseas Growth and Income Investor. I try to maintain a 10% equity allocation in EM and, yes, I've had to rebalance in the last couple years. So far this has been my first real 'conviction' test. Having a very long investment timeline really helps."
"I like T. Rowe Price Emerging Markets Stock (PRMSX) and I dollar-cost average into it monthly," notes jhamlin. "I don't want to hit a home run but just like to be in the game."
Let Foreign-Fund Managers 'Do the Heavy Lifting'
Other readers get their emerging-markets exposure though their diversified foreign funds. "I let my wide-ranging-mandate global equity funds make those decisions," says bnorthrop. "In 2006-08, I was invested about 10% in EM and got a severe haircut a couple of years later, so I dialed back my active involvement. Now, I am a bit south of 1% due to my PM's calls. EM bonds are around 2%, again on PM discretion."
"I get my emerging-markets exposure through Dodge & Cox International Stock (DODFX)," says Nittwit. "I let my manager do the heavy lifting. He is now at 15% in this fund and is why, for now, it is my biggest loser." DGC667 also taps into developing markets through a diversified foreign fund: "I own Vanguard Total International Stock ETF (VXUS) which contains about 17% emerging markets."
And finally, xBanker acknowledges how difficult it can be to truly determine the impact emerging markets have on one's portfolio, whether you own emerging-markets stocks or bonds through foreign funds or dedicated emerging-markets funds--or whether you get exposure to the growth that developing economies offer through U.S. companies doing business in emerging markets. "Basically, this is an interconnected world and does not go quietly into traditional categories."
Susan Dziubinski has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.