Emerging Markets have been outright crushed this year. This is part of the capital flows exiting these hot economies as fear of the Fed cutting back on QE grows. It’s important to be patient when investing in any asset class, but it’s double important when it comes to the Emerging Markets. These economies/companies are very sensitive to changes in the global economy and their currencies even more so which is what creates the wild swings and high volatility for US investors. It’s best to wait for the type of pullbacks we’re seeing now before buying.
Fortunately I’ve had very little exposure to EM stocks the past few months as I saw the US dollar strengthening but you can expect that to change once I see things begin to stabilize. I’ll be jumping into some of my favorite long-term countries. That is, those with favorable demographics and governments that encourage investment.
There are Exchange Traded Funds (ETF’s) for the bulk of countries these days but most charge anywhere from 0.60% to over 1% per year in expenses and fees. I’ve found you can virtually replicate the exposure by buying the top 1 or 2 companies in the ETF and hold them at no annual expense. For example, the top 2 holdings in the Global X Colombia 20 ETF (GXG) make up 25% of the fund! Expect to see names like Fomento Economico, Sociedad Chemica, Banco de Chile, BanColombia, Ambev and Credicorp in the near future. These are companies from countries like Mexico, Colombia, Chile and Brazil, and have been hit harder than Emerging Asia making them more attractive right now.
Take a look at the volatility in the Thailand ETF. As the Thai Baht falls against the US dollar (the chart below shows the US dollar strengthening recently), it adds to the losses of the stocks, wiping out half the gains over the last year in a few short weeks.
US dollar/Thai Baht – 1 year
Thailand ETF (THD) – 1 year
Emerging Market bond funds have been getting hit hard too, dropping anywhere from 6% to 9% in the last month! I’ve already started adding to these and will continue to do so if they fall lower. Bond funds work differently than stock funds. Ideally, it would be great if a bond fund didn’t move and simply made income distributions. However, you can see the ups and downs that occur as bond prices rise and fall from changes in interest rates, credit risk and currency fluctuations. Buying on the dips, just like stocks, works best because you get to ride the price recovery and collect the income.
Emerging Market Local Bonds ETF (ELD) – 3 years, weekly
There’s been a lot of buzz lately about rising interest rates and Fed “tapering” (cutting back on their Quantitative Easing) so I’ll follow up soon with a post discussing my view of interest rates, bonds and the economy. Thanks for following!
Nick