Although emerging markets (EM) stocks have disappointed investors in
recent years, several factors indicate a potential turning point for the
performance of EM stocks, says a new whitepaper by Charles Schwab.
The whitepaper, titled “Finding
Value in Emerging Markets Stocks,” is published as a Q&A with Jeffrey
Kleintop, Schwab’s Chief Global Investment Strategist, and examines
the recent performance of EM stocks, leading up to the current favorable
view, and highlights why investors should consider them.
According to Kleintop, emerging markets are “one of the few asset
classes where valuations are low right now in what has become an
increasingly expensive world for investors. Low valuations account for
global economic sluggishness. But if global economic growth improves or
stabilizes in the euro zone and Japan, the more economically sensitive
EM stocks are better positioned to gain from global growth than the
developed foreign markets.”
Key points in the whitepaper include:
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EM stocks are trading at a significant discount to U.S. and other
global developed stock markets, might benefit from global economic
improvement, be a buffer against weaker global growth and offer
diversification.
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EM stocks often are considered at risk when the dollar rises and
commodity prices fall. However, Kleintop thinks a strong dollar, weak
commodity prices, and solid EM stock performance can coexist quite
easily in the current environment.
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The recognition by the market of the attractive valuation, the
potential buffer against sluggish global growth and the potential
upside resulting from any improvement in the global growth picture is
likely to unfold over many months to up to a year or more.
“I find it surprising that they are often overlooked by investors,”
noted Kleintop of emerging markets. “Forget for a minute that they hold
80 percent of the world’s population, generate 50 percent of the world’s
GDP and represent 13 percent of global stock market capitalization.
Granted, emerging markets countries are not immune to economic
volatility, temporary market swings, geopolitical events or internal
corruption. But historically they have offered rapid economic and
employment growth, lower amounts of debt relative to the size of their
economies than that of developed market nations, and they have a rapidly
growing middle class.”
Though the past is never a guarantee of future results, Kleintop notes
that emerging markets have historically been able to produce much faster
growth than the developed markets when global exports improve, which is
particularly attractive in a world where growth is scarce.
While some characteristics vary by country, Kleintop says investors with
higher risk tolerances should consider emerging markets at the asset
class level, as correlations remain relatively high across the major EM
stock markets, currencies, bond yields, and economic growth rates.
In the end, he says, emerging markets have vulnerabilities but
valuations more than account for these risks.
The full whitepaper, part of Schwab’s Investing Ideas series, is
available here.
Schwab Investing Ideas offer thoughtful analyses of key market trends
and investing opportunities for investors. More information, including
other recently published insights, can be found on Schwab’s
Investing Ideas page.
About Charles Schwab
At Charles Schwab, we believe in the power of investing to help
individuals create a better tomorrow. We have a history of challenging
the status quo in our industry, innovating in ways that benefit
investors and the advisors and employers who serve them, and championing
our clients’ goals with passion and integrity.
More information is available at www.aboutschwab.com.
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Disclosures
Through its operating subsidiaries, The Charles Schwab Corporation
(NYSE: SCHW) provides a full range of securities brokerage, banking,
money management and financial advisory services to individual investors
and independent investment advisors. Its broker-dealer subsidiary,
Charles Schwab & Co., Inc. (member SIPC,
www.sipc.org),
and affiliates offer a complete range of investment services and
products including an extensive selection of mutual funds; financial
planning and investment advice; retirement plan and equity compensation
plan services; compliance and trade monitoring solutions; referrals to
independent fee-based investment advisors; and custodial, operational
and trading support for independent, fee-based investment advisors
through Schwab Advisor Services. Its banking subsidiary, Charles Schwab
Bank (member FDIC and an Equal Housing Lender), provides banking and
lending services and products. More information is available at www.schwab.com
and www.aboutschwab.com.
International investments are subject to additional risks such as
currency fluctuation, geopolitical risk and the potential for illiquid
markets. Investing in emerging markets may accentuate these risks.
Diversification strategies do not ensure a profit and do not prevent
against losses in declining markets.
The information provided here is for general informational purposes only
and should not be considered an individualized recommendation or
personalized investment advice. The investment strategies mentioned here
may not be suitable for everyone. Each investor needs to review an
investment strategy for his or her own particular situation before
making any investment decision.
All expressions of opinion are subject to change without notice in
reaction to shifting market, economic or geopolitical conditions. Data
contained herein from third party providers is obtained from what are
considered reliable sources. However, its accuracy, completeness or
reliability cannot be guaranteed.
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Copyright Business Wire 2014