In my prior writings I’ve written about my cautious optimism towards equity markets. Yes they’ve achieved massive gains in the past few years and are near their record-highs, but I’m of the belief that we’re close to reaching the peak of the market cycle and are due for a downswing. My primary reason for this is the fact that average earnings per share have not grown at nearly as high a growth rate as have equity markets- making the majority of securities overvalued. When investors make this realization and act accordingly, that’s when we’ll see a major correction.
So what other asset classes can we turn to? Equity markets, of course, are not the only game in town. I’ve already written about US government bonds and gold. Silver is another good precious metal alternative as well as palladium, although the latter probably doesn’t have much more upside to be had in the short-term. Aside from these, there’s another area of investment worth exploring: emerging markets.
I’ve increasingly believed emerging markets are the next frontier. Equities have been overbought and will experience anemic gains in the foreseeable future. Emerging market companies, however, are located in developing countries, and by definition, will continue to grow at higher growth rates as more and more people enter the middle-class (this is occurring in places like China, India and Brazil). For perspective, the US GDP growth rate outlook for 2020 is 2.0%, down from 2.2% in 2019, while the IMF predicts global growth for 2020 will clock in at 3.5%, an improvement from 3.2% in 2019.
And don’t take my word for it. Ray Dalio’s Bridgewater Associates recently disclosed its top holdings to the SEC through its 13F-Form, and at the top of the list of its $16 billion in holdings are several emerging market ETFs. These include the Vanguard FTSE Emerging Market ETF (VWO), the iShares MSCI Emerging Index Fund (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG). They also have positions in Brazilian and South Korean ETFs. They round out their holdings with investments in gold and bond ETFs (what I’ve been advocating for a few months now).
Additionally, central banks in 58 developing countries cut interest rates last year, following in the footsteps of the US Fed as inflation fears ebbed and the desire to continue stimulating economic growth prevailed. This has indeed resulted in better performance for emerging market bonds and equities- the aforementioned MSCI EM index rose 15% in 2019.
Various firms are singing the praises of emerging markets, expecting them to outperform the returns of US stocks in 2020. “Companies located in emerging markets sold a record $118 billion of high-yield dollar bonds last year, doubling the pace from five years before.” This is indicative of fund managers’ ongoing search for yield as government debt in developed nations presents low-to-negative yield opportunities and equities in these countries seem increasingly more expensive and thus offer lower expected future returns.
Positive performance in emerging markets of course hinges upon their realization of expected growth rates and continuing global growth. So if you still have an appetite for equities and are optimistic about the future, emerging markets may be a great option for you.