Emerging Issues (Part 1)

Emerging markets are hot. Should you be jumping in?

With the advent of Exchange Traded Funds and dedicated mutual funds, do-it-yourself investors can invest in Chinese index funds and Russian equities. Certainly emerging markets have a lot to recommend them: they’re typically running current-account surpluses, their fiscal budgets are in good shape, they have plenty of reserves, and technological innovation is allowing these countries’ productivity to grow by over 5% per year, whereas 2% growth is normal in the developed world.

To top it off, their populations are growing. That provides a ready supply of labor for their economies, and allows them to grow organically, from within. What’s not to like?

One issue is their hot-ness. That makes them expensive. No matter how good the prospects or how well-run a business is, if the price is too high, it won’t be a good investment. But good management is an issue: these countries haven’t been well-managed for very long. Russia defaulted in 1998; Brazil suffered from rampant inflation until that was subdued in 1994; Indonesia was run by a dictator for thirty years until 1998.

Many of these markets are simply too young to be considered mature. The last ten years have seen tremendous progress as economic freedom has expanded around the world. But when it comes to committing your investment dollars, remember: return of your investment is more important than return on your investment.

Douglas R. Tengdin, CFA
Chief Investment Officer
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