By Gary Brooks, CFP®
Emerging markets are on a tear. Since bottoming on January 21, the MSCI Emerging Markets Index has swiftly moved into bull market territory with a gain of 22.46% through April 18. There may be momentum and relatively attractive measures of value that keep emerging markets in this bull market for awhile. But there is also much recent precedent for the emerging market bull to lose its stamina.
I chose the iShares Emerging Markets ETF (EEM) which tracks the MSCI Index to represent an actual investable product for this asset class. The index is composed of 24 countries but China, South Korea and Taiwan make up roughly 50% of the index.
From April 29, 2011 through April 18, 2016 EEM has declined 30%, even including this recent bump up. As you can see in this chart from Morningstar, the five-year trend for EEM clearly is downward. But we are currently experiencing the fifth bull market (20+% gain) amid that longer-term decline.
EEM bull markets since April 29, 2011
|Bull start||Bull top||Return|
Of course, each bull was overcome by a larger bear market. The most recent peak to trough from September 5, 2014 through January 21, 2016 was a 38% decline.
This much volatility makes emerging markets difficult to hold for long-term investors. Each burst upward prompts investors to hope for a return to the 2003 through 2007 period when emerging markets posted average annual returns over the five years of 37%.
A sustained bull market for emerging markets has been very elusive since then. The past four emerging bull markets have turned fairly quickly after eclipsing a 20% gain. But conditions are different each time as the investment landscape and its many influences shifts. And conditions are very different from one emerging market country to the next. China’s market is driven by different factors than Russia and different yet again from Brazil and so on.
We think emerging markets stocks should be included in a long-term, globally-balanced investment portfolio. Given the expanding middle class of emerging countries and the likelihood that this group becomes a key component of the global economy, we think investors can benefit.
The entire global stock market has approximately a 6.5% weight to emerging markets countries by market cap. If you are a balanced investor with roughly 60% of your holdings in stocks, that would translate to an approximately 4% weight for emerging markets stocks. Overweighting emerging markets can pay off in spurts but it definitely presents higher volatility than U.S. stocks.
~ Brooks, Hughes & Jones Wealth Advisors — Gig Harbor, Washington