Investment Adventures in Emerging Markets

Readers’ Questions Answered

This post is also available in: German

People who follow me know that one of my favorite things to do to really get to know a city is to walk or cycle the streets and interact with the locals. The great questions you readers submit are kind of like a digital version of that experience, providing me with invaluable perspectives and ideas from around the world. Thank you! Please read on for my answers to a few of your recent questions.

Q: Why do stock markets in emerging economies often go down (often more) when there are problems in industrialized economies? Somsak – Romania

Currently the amount of money the U.S. and Europe have invested in emerging market countries outweighs that of emerging market domestic investors, but the percentages are shifting as emerging market investors accumulate wealth and become more focused on their local markets. When there is bad news in the U.S. or Europe, the first reaction of investors in those countries is often to exit places furthest from home and those that are perceived as more “risky.” Emerging markets are often far from “home” and are perceived as risky, so this inclination to withdraw assets can impact emerging markets more dramatically than their more established counterparts. Attitudes, of course, are changing as more investors realize that many emerging markets are generally growing faster, have more foreign reserves and have lower debt-to-GDP ratios than most developed markets, so it will be interesting to see how this dynamic evolves.

Q: Don’t you feel frustrated or even discouraged that good companies in good economies (especially in Asia) are being dragged down by problems in other parts of the world? And don’t you feel that a lot of things don’t make much sense at this time? For example: Government bond yields are so low and people are still buying. Peter – Netherlands  

It is quite amazing that we have so many of those anomalies in the markets. However, it doesn’t make us feel frustrated or discouraged, because it gives us an opportunity to buy undervalued stocks! The primary way we can get good value potential is by buying when others are selling and when we feel companies are undervalued.

Q: Can you comment on your outlook for commodities? Are you still bullish on oil, despite the recent decline?  Do you view gold’s future as a store of value, or a traditional commodity affected more so by demand for jewelry, ornament, etc.? And, do you favor palladium or platinum?    Therese – Hong Kong

We are still bullish on commodities for the long term, with the expectation, however, that there will be considerable volatility. When we look at the potential demand in countries all over the world, particularly in the emerging markets, we come to the conclusion that the prices of commodities overall could potentially rise. Oil is getting more expensive and difficult to find. The same is true for gold and many other commodities. At the same time, demand is rising. I think gold will likely remain a store of value potential as well as a desired jewelry item. I also believe palladium and platinum will continue to be in demand not only for jewelry, but also because of their use in catalytic converters in auto vehicles, which should grow along with global auto sales.

Q: Besides thinking “long-term,” are there any other suggestions that you can give regular investors like me to have the stomach to invest or just to keep ourselves from walking away from investing? I like to invest in Asia because I think the people are active and the economies are vibrant. However, Asia’s markets have been pushed down by waves of crisis after crisis from developed countries. Where do you think this is all heading? Andreas – United Kingdom 

I’ve long been a proponent of the dollar cost averaging strategy, taking a long-term view and investing systematically by putting the same amount of money each month or quarter into a diversified portfolio of quality companies over a period of many years.** I also think it’s important to not pay too much attention to the short-term volatility of the markets or what the headlines are saying. If you can focus on dividend-paying companies that appear to have good earnings growth potential and little debt, it may also help you stay committed to investing with a long-term mind-set.

Q: I am curious on how reliable the statistical sources provided by the Chinese authorities are and how an investor in emerging markets should best interpret the data. Lukas – Canada  

From my experience, statistics in China can be just as reliable as statistics you can get in Canada or the U.S. China is a big country and the authorities need reliable data just like any government around the world. I believe the days are gone when the government deliberately wanted to manipulate the data for propaganda purposes. But even if you don’t believe the statistics, there are many ways to confirm and double-check. For example, we recently checked the export statistics of Brazil, Australia, the U.S., Germany and other countries in relation to China. Those numbers pretty much reflected the high growth and demand that we were seeing from the Chinese statistics. It’s always important to check and double-check statistics, because, even without manipulation, there can be statistical errors which creep into data, no matter what the source. 

**Dollar-cost averaging doesn’t guarantee a profit or eliminate risk, and it won’t protect you from a loss if you sell shares when the market is declining or at a low point. Before adopting this strategy, you should consider your ability to continue investing through periods of low price levels or changing economic conditions.


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