for a long time. And sometimes, an asset is cheap for a reason. It makes sense for higher-risk emerging markets to be at least somewhat cheaper than U.S. markets... But that doesn’t mean you should avoid emerging markets entirely. Right now, the premium of U.S. markets is close to all-time highs – far higher than warranted. And the pattern of mean reversion argues that emerging markets are due to outperform U.S. stocks in the coming years. That doesn’t suggest you should go crazy. No matter what, it’s probably a good idea to keep your portfolio’s exposure to emerging markets relatively limited – say, somewhere between 5% and 15%, depending on your risk appetite... when you’ll be needing your investment capital... and your overall time horizon. It’s also an argument for a well- diversified approach to investing in emerging markets. A HASSLE-FREE BET ON EMERGING MARKETS What we’re looking for is a way to diversify outside U.S. markets... to capture the valuation discount of emerging markets... and to benefit from mean reversion as American stocks eventually slow down and shares in emerging markets play catch-up. There are lots of ways to do this. And what I recommend today is the iShares MSCI Emerging Markets ex China Fund (Nasdaq: EMXC). EMXC is a broadly diversified exchange- traded fund (“ETF”) listed on the Nasdaq stock exchange. While it holds foreign stocks,
Over the past year (as of April 30), both U.S. and emerging markets are up around 50%. That huge jump follows the global market correction as the severity of the coronavirus rose to the front of investors’ minds. But looking to three-, five- and 10-year performance, you see a huge divergence. American markets have boomed, while emerging markets – the biggest of which include China, Taiwan, South Korea, and India – have dramatically underperformed. Over the past five years, U.S. markets – represented above by a broad index of nearly 4,000 traded stocks – have risen a total of 125.6%... while emerging markets are up 73.1%. And over the past decade, American stocks are up 271.8% – compared with just 36.5% for emerging markets. And now – after an extended run of strong performance – U.S. markets are more highly valued than emerging markets. Two of the most widely used ways to gauge how “expensive” a market is are the price-to- earnings (P/E) ratio, which compares the share price to the company’s earnings per share... and the price-to-book (P/B) ratio, which reflects the value of a company’s assets minus the value of its liabilities, per share. And right now, emerging markets sport a P/E of 18, compared with 29 for the all-U.S. stock index... That means U.S. stocks are 61% more expensive. Emerging market stocks trade at a P/B of 2.3, compared with 3.9 for the U.S. – a 70% premium for American stocks. Admittedly, valuation and the “cheapness” of a stock or market make up only one part of the story. Cheap stocks can remain that way
American Consequences
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