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By Ryan Payne, President

I found an article recently on MarketWatch.com called “Opinion: Incredibly Cheap Emerging- Markets Stocks Still Aren’t Worth Buying.” This is even though emerging-markets stocks are up double this year compared to U.S. markets. But the author calls it a “pseudo rally” in emerging-markets stocks that’s running out of steam because they’re in a secular bear market.

Three Keys:
1

A recent article on MarketWatch.com warns investors to steer clear of emerging markets

That author’s opinion actually defies extensive evidence to the contrary

The U.S. market is now fully valued and emerging markets are a smart buying opportunity

So his premise is the earnings growth isn’t that great. Meanwhile, Morningstar analyzes trends like this and estimates that earnings for emerging-markets companies will grow at 10% annually for the next five years. Whereas the S & P 500 projects to grow at 9% a year. So emerging markets are predicted to grow faster than the U.S., and if you look at emerging-markets valuations, they’re cheaper. So what am I missing here? Because it sounds like a pretty good deal. Maybe that author is short in the emerging markets and he hopes writing a negative article will get people to sell.

Then he goes on to say the U.S. dollar should remain strong. Well, the dollar actually took a huge hit last week, which was very good for emerging markets and they held up really well. So the author is wrong on that point too. Third, he says trade wars will hurt emerging markets most. Well, we’ve heard a lot of talk lately about a “Border Adjustment Tax” and still the emerging markets keep going up. Then he also says the Chinese economy is shaky. But the news coming out of China is they’re likely to have pretty good growth, at about 6.5% a year. Whereas the U.S. by comparison is looking at about 2% growth.

So my argument, and I think what investors need to be concerned about, is you could have just owned the S & P 500 or large cap U.S. companies for the past eight years, and you would have been right because the market has been on a magnificent run. But the problem is if you look at historical valuations, right now we already have a fully valued U.S. market, and you’re going to need a return on your portfolio moving forward. So it’s important to reposition your portfolio globally, because many of the valuations overseas are a lot cheaper and have significantly more room to grow in the future.

You need to be smart about it, look at your portfolio objectively and recognize that the U.S. has had a great streak, but realistically it can’t keep up that kind of growth. Especially when we now have what some would actually call an overvalued U.S. market. That’s why articles like the MarketWatch story are totally off-base, because there are other markets around the world that historically do very well and right now are actually outperforming the U.S. market.

 

 

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