Emerging Markets
Well, there is certainly some volatility in the US markets the past few weeks. And it seems that the market’s volatility is not limited to the US as Emerging Markets are also taking a big hit as well. But maybe not for the reason you are thinking.And do the Emerging Markets present an opportunity for you as an investor? In this post, we will look at a few things, and I will state some things about a recent trip I made to visit my wife’s family in Peru, an Emerging Market.
So why are the Emerging Markets taking a hit along with the US markets when there should not be much of a correlation between them. That answer is not all that simple to answer, but one reason is the US dollar is strong and has been for the majority of 2018. A strong US dollar will typically make it more difficult for an Emerging Market country to borrow funds based and backed by the US dollar. The reason for this is the home country will typically have to spend more of its currency in the conversion to US dollars to pay the interest and ultimately the principal on the bonds the host company wrote. Also, as the Federal Reserve started raising interest rates in late 2017 and has done several times this year, and it may not be done raising them, it means other countries with bonds issued in US dollars will also be paying more on the interest payments connected to the bonds. And finally the currency rates constantly change, and a strong dollar will generally mean more of the home currency will be required to get a set number of US dollars for various transactions. So the economic prosperity of the US and its strong dollar is causing some issued for countries that are considered to be Emerging Markets.
Investment opportunity for foreign markets
But this is not a reason to shy away from Emerging Markets right now. In fact, a strong US economy with a shaky stock market and the strong dollar may be presenting an investment opportunity for foreign markets and in particular Emerging Markets. Here I am not advocating that you go out and buy an individual company’s bonds or stock,that is indeed too risky for my taste to be honest. But if you have the time and means of doing the proper research on individual companies in foreign markets and particular Emerging Markets,I think it could be acceptable to invest that way provided you are completely comfortable with the risks associated in doing so. But there is no reason why now is not a good time to buy an indexed Exchange Traded Fund or mutual fund that invests in Emerging Markets in either equities or bonds. That way you can avoid the risks associated with a single country or company’s failure.
While I do not advocate a bond fund, many low-cost bond funds can be purchased through companies such as Vanguard or T. Rowe Price that focus on Emerging Markets. This way you are pegged to a published index for that company’s fund. An ETF that I invest in that has done about par when compared to the overall market, and especially Emerging Markets is Vanguard’s FTSE Emerging Market ETF with the ticker symbol VWO. I have been investing a set amount into my ROTH IRA held with Vanguard,free with them as there are no charges or commissions paid on buying this fund,and its expense is only 0.14% annually. Yes, I am down for the year on this fund, but I see a lot of upside potential over the next decade in this type of fund that invests in Emerging Markets. Of course, you can pay more in fees to have an actively managed fund but in doing this look for one that has no front or back in load charges and its management has a proven track record of beating an index pegged to Emerging Markets. Otherwise, you should stay with an indexed ETF or mutual fund.
Emerging Markets of US and Peru
And the next part of the post is one of the reasons why I am so high on Emerging Markets is my recent trip to Peru. I have been going to Peru now for over four years, and the exchange rate on its currency has been consistently between 3.20 Sols and recently 3.36 Sols to a US Dollar. Now that is a fairly consistent exchange rate over four years for an Emerging Market country. And on my last trip there a week ago the city of Lima is as vibrant and busy as any major city in the US. There are businesses open and packed with people at all hours of the day and night; they are working on improving their infrastructure, the prices for real estate is strong and appreciating in Lima. The country also has a good financial industry, and while there have been some issues with corruption in the government, it has a strong democracy and its people want to see progress not only in its big cities but throughout the entire country.So I found an ETF from iShares that invests in Peru, and I found its MSCI All Peru ETF, ticker EPU. So I printed off the 25 largest holdings of this ETF and took that list with me to Peru to ask my wife’s family about these companies, many of which are in fact trading on US and Canadian markets. They knew of all of them and said that they were basically similar to the companies on the DOW Industrial Average here in the US, but for Peru. Like most of the world’s markets right now this ETF is near a 52-week low but to me, that means it is a perfect buying opportunity to get some well-run companies in an Emerging Market that will have some excellent growth over the next decade as well.
So while the markets in the US are down and appear to be assisting in dragging down the other markets around the globe, it means this is a buying opportunity both here and abroad,especially in the Emerging Markets of the world. If you have any questions or comments, please feel free to contact me directly or leave a message on the site.
