Tuesday, October 31, 2023

📈 Should you consider emerging markets?

October 31, 2023 View online | Sign up
Finny
Gist

Good day. The US stock market is one of the most well-known in the world, and it can be easy to lose sight of just how engulfing it is. Can you guess what percentage of the globe's stock market values is consumed by the US alone? a. 13% b. 27% c. 42%.

Here are the topics for today:

  • Should You Consider Emerging Markets?
  • Venture Deals, Private Equity, and IPOs Still Slumped
  • Some Habits of Effective Investors

MARKET OUTLOOK

Should You Consider Emerging Markets?

As more established world economies endure a time of slumping growth prospects, emerging markets are simultaneously blooming, and they may be more relevant than ever. 

Emerging markets (EM) can arguably be a powerful complement to a largely US-based investment portfolio, but they are often misunderstood. What are they exactly, and what are their benefits and tradeoffs? 

What's an "emerging" market?

Emerging markets usually refer to economies showing strong economic growth while showing some characteristics of a developed economy. In other words, they are countries in transition, usually from a place of "developing" to "developed."

Which countries are emerging?

Research organizations and data providers each have slight variations in what they determine as an EM country. For example, the IMF has classified 23 nations as emerging, the S&P picked 23 and MSCI has 24 countries on the list.

What's the appeal?

  • Economies and markets mismatch: We may be underestimating the benefits of EM because the size of their financial markets is usually small relative to the size of their economies. For example, emerging countries account for 45% of the world's GDP, but their stock markets are worth only 27% of the world's total.
  • Bright outlook: Strong global GDP growth is expected, according to the IMF. They forecast an average annual GDP growth of 4% for emerging markets in 2023-2024, compared with 1.5% for developed economies. That's positive for emerging market equities, which tend to perform better when demand for commodities and exported goods is strong.
  • Diversification for US investors: EM markets are less correlated with US markets, and can also offer currency diversification, which will be useful when the US dollar is weak.
  • The long-term growth trends: According to Schroders, EM represent roughly 87% of the world population, 45% of global consumer spending, and in less than 20 years, they are expected to account for 57% of the world's total GDP. Other growth drivers include urbanization, tech & industrialization driving economic growth and the rising middle class driving consumer spending.

What's not so appealing?

  • Higher risk, higher volatility: EM stocks are generally more volatile than developed market (DM) stocks. Over the last ten years, the standard deviation, which measures volatility, was 30% higher for EM than DM stocks, according to Morningstar.
  • Now about that higher volatility: It stems from higher economic risk, political risk, currency risk, and liquidity risk. For example, consider the persistence of the Chinese government's checks and actions towards internet-related companies. And when an EM currency is declining, your investment is worth less when converted to USD.  There's also the risk it may be easy to bring money in, but not always to get it out.

Ways to get EM exposure

First, determine whether going the passive or active route serves you and your long-term goals best. Do you want to go the way of a low-cost index mutual fund/ETF or pay for the expertise of an active manager? Do you want broad and diverse EM or a single EM country exposure? How much does your risk tolerance allow you to allocate? How long is your time horizon? 

If you do decide to undertake investing internationally on your own, as always, don't forget to rely on some old-fashioned due diligence. And if you don't have all day to scour the internet for their life story, consider a broad-based basket of emerging market countries through an index fund or ETF.
Growth vs. Value Investing
Investing Basics
7 mins

MARKET OUTLOOK

Venture Deals, Private Equity, and IPOs Still Slumped

Some of the most lucrative plumbing in the financial system has been a bit sluggish the last couple of years during broader uncertainty. Venture funding, private equity, IPOs, and even M&A deals have had difficulty slogging through the mud of higher interest rates. 

A dreary season for fund seekers

  • Q3 venture deals totaled $31.7B, down slightly from Q2's $37B and down 31% from Q3 last year. This drop makes for a drawdown on top of a drawdown, as the VC market was already in a slump dating back to Q1 2022.
  • Private equity, not to be confused with venture capital, saw firms raise $106.7B globally in the most recent Q2 data, marking a 35% decline from the same time span in 2022, and the lowest since Q2 2018.
  • IPOs in 2023 are on track to dwindle below even 2022's output of 181, a level not seen since 2016. Despite better market conditions, the stock market is on pace to welcome just about 159 newcomers this year.
  • Mergers and acquisitions, which are an indirect measure of a company's zeal for growth and expansion, have dwindled similarly. Globally, about 40,000 deals were done across Q1-Q3 of this year, and while that may sound high, it's actually a 24% decline from last year.

Any implications?

Despite what the markets say, the economy has been in a tightening cycle. This makes debt more expensive, discretionary spending less common, risky investments scarier, and growth harder to come by. As a result, private businesses have a tougher time appealing to both investors and customers alike. 

While realities like this may not seem as if they have implications for the markets and investors, they do. The stiffness we're seeing in these sub-economies is just a symptom of the broader markets, and although indices may be green this year, that doesn't mean we're out of the water.

MONEY MINDSET

Some Habits of Effective Investors

They say hard work beats talent when talent doesn't work hard, and it's surely rare to find an innately talented investor who can pick moonshot stocks with any deal of accuracy. Investing is a long game, and our best chance to win is often just through consistency and prudence rather than luck and hope. 

That being said, it's paramount to form some reliable and profitable habits that can turn us into effective investors in the long run, so here are just a few ideas. 

  • Make saving necessary: Saving money should be in the budget, especially until you have your emergency fund built up. In order to invest, we first need to have something to fall back on, and prioritizing your savings account early and often is the quickest route to achieving that. 
  • Maximize employee benefits: What came to your mind? Employee matches, probably, and that's exactly what we're talking about. If you're offered a match on your retirement contributions, maxing that out will add up over time, because free money (i.e., the match) and compounding interest (i.e., tax-advantaged growth) are just nice like that. 
  • Have a plan: Whether it be the asset allocation of your retirement account, a monthly investing budget, or just a stop loss, intentionality almost always wins in investing. Systematically going about your investing and having a strategy in place will save you a lot of money, and likely make you a lot more too.

🌊 BY THE WAY
  • 🚀 Answer: 42%. Despite having the world's 3rd largest population and trailing India and China massively, the US stock market makes up about 42% of the globe's investments (Visual Capitalist)
  • 💼 Labor force participation gap between men & women closes (Axios)
  • 👀 ICYMI. Habits that may be holding you back (Finny)
  • 🤖 FOBO is the new FOMO for employees (Axios)
  • 📚 Finny lesson of the day. While boring usually gets the job done, it's always important to explore alternatives for your portfolio:
What are Alternative Investments?
Investing Basics
7 mins


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