Doubling down on EM [Emerging Market]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Startled Cat
Posts: 373
Joined: Thu Apr 03, 2008 8:54 pm

Doubling down on EM [Emerging Market]

Post by Startled Cat » Sat Oct 06, 2018 11:21 am

I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably. Particularly now with VWO under $40, it’s hard to resist buying EM for the long haul.

The long run of underperformance in EM has definitely been frustrating, but I think buying more is the right move. I’m very confident that these countries face a bright future and that their stock markets will collectively go much higher than their current levels in a few decades. If forced to choose, I would much rather own a reasonably-valued basket* of high-growth countries, of which many have positive demographics, than overweighting the US. Many people here have US-heavy portfolios, and I congratulate them for their impressive recent returns. But I don’t expect that outperformance to continue indefinitely.

EM now accounts for nearly half my stock allocation (most of the rest is international DM). I expect this tilt will have a big impact on the eventual returns of my portfolio. If EM does well, the tilt will pay off. If not, frankly, my retirement might be less comfortable. It’s a big bet that these economies will pull through despite their present struggles, that valuations matter, and also on the concept of purchasing power parity. In places like Taiwan, Malaysia, and South Africa, I’ve been amazed at how much local prices differ from dollar prices, even on imported products like Nespresso capsules (my personal Big Mac Index). Right now I’m on my way to India, where the rupee is at an all-time low. A large part of the recent decline has been due to exchange rate movements, but I think these currencies will tend towards PPP with the dollar over a long enough time period.

* Some might object that the EM indexes are very concentrated in China, which has demographic problems and an alleged property bubble. This is true, but I’ve made an effort to avoid cap-weighted EM indices for exactly this reason. I hold small-cap and value ETFs that are light on China, and also several country-specific ETFs. At the risk of going off on a tangent, I’m actually relatively bearish on China. I don’t think a high level of government involvement in their economy exempts them from having a business cycle, and I see them storing up imbalances that will be very painful to correct later. But I’m audacious enough to believe other countries lumped into the same category as China can do well even if China disappoints.

Valuethinker
Posts: 36728
Joined: Fri May 11, 2007 11:07 am

Re: Doubling down on EM

Post by Valuethinker » Sat Oct 06, 2018 11:43 am

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably. Particularly now with VWO under $40, it’s hard to resist buying EM for the long haul.
....
* Some might object that the EM indexes are very concentrated in China, which has demographic problems and an alleged property bubble. This is true, but I’ve made an effort to avoid cap-weighted EM indices for exactly this reason. I hold small-cap and value ETFs that are light on China, and also several country-specific ETFs. At the risk of going off on a tangent, I’m actually relatively bearish on China. I don’t think a high level of government involvement in their economy exempts them from having a business cycle, and I see them storing up imbalances that will be very painful to correct later. But I’m audacious enough to believe other countries lumped into the same category as China can do well even if China disappoints.
You are avoiding one pitfall of EM stocks, the heavy weighting on China.

The problem seems to be the Chinese earnings picture. It appears that some types of earnings management may be widespread. I should stress I am not an expert on this. And that the Chinese authorities are very aggressive against anyone who would try to correct this - rather as if Bethany Maclean was prosecuted for daring to question Enron.

In addition you may well have similarities to Japan 1989. Instead of corporate cross holdings you have state holdings. You have outright government manipulation of equity index levels. Many of the profits may be from financial activities eg selling property (and thus, not really profits at all).

Thus the very high valuations of certain Chinese companies such as the internet stocks is of concern.

Overall I would suggest that overweighting EM is dangerous. EM stocks are not representative of the underlying economies, in many cases. They tend to be resource stocks + financials. Some of the biggest exposure to EM is actually in the Canadian, Australian and other stock markets (think, for example, Nestle; or Canadian and Australian and Brazilian commodity producers).

You can be right about the economic direction of travel without being right about the stock markets themselves.

User avatar
iceport
Posts: 4008
Joined: Sat Apr 07, 2007 4:29 pm

Re: Doubling down on EM

Post by iceport » Sat Oct 06, 2018 11:46 am

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
EM now accounts for nearly half my stock allocation (most of the rest is international DM). I expect this tilt will have a big impact on the eventual returns of my portfolio. If EM does well, the tilt will pay off. If not, frankly, my retirement might be less comfortable.
Well, I suppose you've asked — and answered — the key question here: "What if I'm wrong?"

The risk of a less comfortable retirement is not one I'd be comfortable taking, but it might be appropriate for you, depending on your circumstances.
"Discipline matters more than allocation.” ─William Bernstein

HEDGEFUNDIE
Posts: 1249
Joined: Sun Oct 22, 2017 2:06 pm

Re: Doubling down on EM

Post by HEDGEFUNDIE » Sat Oct 06, 2018 11:51 am

If you are going to tilt so heavily to EM I would suggest you consider moving some of your allocation to a currency hedged fund like HEEM or EMMF. Much of the recent underperformance of EM can be explained by the strong dollar, if you’re betting on fundamental country performance hedging out local currency will give you a smoother ride.

staythecourse
Posts: 6221
Joined: Mon Jan 03, 2011 9:40 am

Re: Doubling down on EM

Post by staythecourse » Sat Oct 06, 2018 12:11 pm

EM is 20% of my portfolio and have no issues continuing to add to keep that static allocation. The difference is if EM went to 0% it would make NO difference in my retirement. If it is going to make a difference I am not so sure I would be so heavy.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
whodidntante
Posts: 4333
Joined: Thu Jan 21, 2016 11:11 pm

Re: Doubling down on EM

Post by whodidntante » Sat Oct 06, 2018 12:30 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
If forced to choose, I would much rather own a reasonably-valued basket* of high-growth countries, of which many have positive demographics, than overweighting the US.
To me this is a rational thing to do from an expected return perspective. Most people cannot value relative expected returns on an asset that has recently been beaten down. Risk aversion and recency bias are powerful. But if it had been doing well then expected returns would not be so relatively high, so that means such investors cannot ever be comfortable doing it.

SpideyIndexer
Posts: 407
Joined: Thu Apr 02, 2015 10:13 pm

Re: Doubling down on EM

Post by SpideyIndexer » Sat Oct 06, 2018 12:45 pm

staythecourse wrote:
Sat Oct 06, 2018 12:11 pm
EM is 20% of my portfolio and have no issues continuing to add to keep that static allocation. The difference is if EM went to 0% it would make NO difference in my retirement. If it is going to make a difference I am not so sure I would be so heavy.

Good luck.
So I guess if it doubles in value it will make no difference either. Are you thinking it has a good chance of increasing much more? Just trying to understand.

Elysium
Posts: 1408
Joined: Mon Apr 02, 2007 6:22 pm

Re: Doubling down on EM

Post by Elysium » Sat Oct 06, 2018 1:20 pm

I have held EM / value for long period and continue to hold, and agree the volatility during last few years hasn't been rewarded with higher returns. One day it will come back with high returns, just don't know when and if ever.

That said, I have decided not to add anymore to it during the latest decline and let it just settle itself wherever it lands. My reading is that EM has significant headwinds going against it from the Tariffs / Trade war situation, and the strong USD. Until we clear the hurdle of tarrifs / trade it is unlikely to produce greater returns. Who knows though for sure.. anyway probabaly just safe not to double down without knowing the end game on trade. You will lose some extra bonus from re-balancing if it comes back strongly, that's okay, because there could be significant downside if things sour further.

In fact. I have moved some money lately from EM into US in anticipation of losses on both, but losing less with US, so far it has turned out to be true. Again, who knows what will happen though.. I am prepared to be wrong, but to me again significant downside in EM if things starts downhill. US stocks will lose, but EM wll lose more. I don't know how we can perceive a scenario where US stocks suffer losses while EM gains. OTOH, if US stocks continue upwards that would be at the expense of EM stocks in the short term. At least, that is my uninformed reading. Take it for what it's worth.

User avatar
JoMoney
Posts: 6307
Joined: Tue Jul 23, 2013 5:31 am

Re: Doubling down on EM

Post by JoMoney » Sat Oct 06, 2018 1:36 pm

Is there a question here? Looking for cynical responses or supportive?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

hdas
Posts: 408
Joined: Thu Jun 11, 2015 8:24 am

Re: Doubling down on EM

Post by hdas » Sat Oct 06, 2018 1:38 pm

I have three pronged approach to EM:

1. Long term retirement accounts holding at global market weights with normal rebalancing.
2. Cane Investing[1] looking to profit from the panics and subsequent 3-10% bounces. [2]
3. In the explosive winter of 2015 I purchased local currency inflation adjusted CD's and regular CD's

[1] Clew's Cane Investing - Fifty Years in Wall Street
Image

[2] See this thread viewtopic.php?f=10&t=256520
Stay the course and buy some more.

NYCwriter
Posts: 195
Joined: Thu Sep 17, 2015 12:46 am

Re: Doubling down on EM

Post by NYCwriter » Sat Oct 06, 2018 1:53 pm

Well, they are cheap. I actually reduced my long VWO recently, and also closed my India ETF (INDA) which had done well for 3 years but was relatively expensive and somewhat riskier at present.

But I was making small reductions in high flyer individual US equities as well (prioritizing VTSAX which I always leave alone) and adding a bit more to short-term treasuries to move toward a fully moderate allocation. I had 20% in Int'l, so this was less about rotating and more about staying below 20% (I think 18% now).

I TLH'd Total Int'l for VEA/VWO at the end of 2015 and still have unrealized gain despite the recent underperformance and drop.

User avatar
unclescrooge
Posts: 2698
Joined: Thu Jun 07, 2012 7:00 pm

Re: Doubling down on EM

Post by unclescrooge » Sat Oct 06, 2018 2:25 pm

HEDGEFUNDIE wrote:
Sat Oct 06, 2018 11:51 am
If you are going to tilt so heavily to EM I would suggest you consider moving some of your allocation to a currency hedged fund like HEEM or EMMF. Much of the recent underperformance of EM can be explained by the strong dollar, if you’re betting on fundamental country performance hedging out local currency will give you a smoother ride.
Shouldn't you hedge against currency when the dollar is weak, instead of being at high point?

User avatar
unclescrooge
Posts: 2698
Joined: Thu Jun 07, 2012 7:00 pm

Re: Doubling down on EM

Post by unclescrooge » Sat Oct 06, 2018 2:28 pm

Valuethinker wrote:
Sat Oct 06, 2018 11:43 am
Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably. Particularly now with VWO under $40, it’s hard to resist buying EM for the long haul.
....
* Some might object that the EM indexes are very concentrated in China, which has demographic problems and an alleged property bubble. This is true, but I’ve made an effort to avoid cap-weighted EM indices for exactly this reason. I hold small-cap and value ETFs that are light on China, and also several country-specific ETFs. At the risk of going off on a tangent, I’m actually relatively bearish on China. I don’t think a high level of government involvement in their economy exempts them from having a business cycle, and I see them storing up imbalances that will be very painful to correct later. But I’m audacious enough to believe other countries lumped into the same category as China can do well even if China disappoints.
You are avoiding one pitfall of EM stocks, the heavy weighting on China.

The problem seems to be the Chinese earnings picture. It appears that some types of earnings management may be widespread. I should stress I am not an expert on this. And that the Chinese authorities are very aggressive against anyone who would try to correct this - rather as if Bethany Maclean was prosecuted for daring to question Enron.

In addition you may well have similarities to Japan 1989. Instead of corporate cross holdings you have state holdings. You have outright government manipulation of equity index levels. Many of the profits may be from financial activities eg selling property (and thus, not really profits at all).

Thus the very high valuations of certain Chinese companies such as the internet stocks is of concern.

Overall I would suggest that overweighting EM is dangerous. EM stocks are not representative of the underlying economies, in many cases. They tend to be resource stocks + financials. Some of the biggest exposure to EM is actually in the Canadian, Australian and other stock markets (think, for example, Nestle; or Canadian and Australian and Brazilian commodity producers).

You can be right about the economic direction of travel without being right about the stock markets themselves.
Yes, EM stocks are risky.

Shouldn't there be a risk premium associated with this?

HEDGEFUNDIE
Posts: 1249
Joined: Sun Oct 22, 2017 2:06 pm

Re: Doubling down on EM

Post by HEDGEFUNDIE » Sat Oct 06, 2018 2:34 pm

unclescrooge wrote:
Sat Oct 06, 2018 2:25 pm
HEDGEFUNDIE wrote:
Sat Oct 06, 2018 11:51 am
If you are going to tilt so heavily to EM I would suggest you consider moving some of your allocation to a currency hedged fund like HEEM or EMMF. Much of the recent underperformance of EM can be explained by the strong dollar, if you’re betting on fundamental country performance hedging out local currency will give you a smoother ride.
Shouldn't you hedge against currency when the dollar is weak, instead of being at high point?
I'm not advocating hedging because it delivers better returns. I'm advocating hedging to reduce volatility, which you benefit from no matter what the dollar does.
Last edited by HEDGEFUNDIE on Sat Oct 06, 2018 3:24 pm, edited 2 times in total.

sillysaver
Posts: 154
Joined: Thu Oct 08, 2015 5:24 pm

Re: Doubling down on EM

Post by sillysaver » Sat Oct 06, 2018 2:37 pm

Investors have short memories.

VWO was up 11.75% in 2016 and 31.8% in 2017. It was up from a low about $33 to 51 at the peak in January 2018, for a gain of over 50%.

MJW
Posts: 665
Joined: Sun Jul 03, 2016 7:40 pm
Location: Pacific Northwest

Re: Doubling down on EM

Post by MJW » Sat Oct 06, 2018 3:22 pm

EM always has to be so moody and dramatic. It can't just chill out and be mellow in your portfolio. 8-)

UpperNwGuy
Posts: 1254
Joined: Sun Oct 08, 2017 7:16 pm

Re: Doubling down on EM

Post by UpperNwGuy » Sat Oct 06, 2018 3:43 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
The long run of underperformance in EM has definitely been frustrating, but I think buying more is the right move. I’m very confident that these countries face a bright future and that their stock markets will collectively go much higher than their current levels in a few decades.
Two questions for you:
1. Why are you "very confident that these countries face a bright future"?
2. How long is "in a few decades"?

I don't share your confidence, and I fear that your "in a few decades" will be beyond my investing horizon. I don't avoid international, in fact I have 20% of my equities in Vanguard's Total International, but unless the "bright future" happens in the next 10 or 15 years, it won't help me.

KJVanguard
Posts: 74
Joined: Fri Oct 05, 2018 3:39 am

Re: Doubling down on EM

Post by KJVanguard » Sat Oct 06, 2018 3:56 pm

I too am overweighted in EM (including an EM small-cap value fund -- DGS, even though I dislike their higher expenses). I'm overweighted in international stocks overall, with 54% foreign and 46% domestic. The non-stock portion of my portfolio resides in Short-Term Investment Grade for relative safety -- minimal interest rate risk & minimal default risk. (Yes, I know it can go down if we have another 2008 where everything that's not a Treasury is treated like junk on the verge of default, even though I don't recall a single bond in that fund defaulting in 2008.)

I don't stick strictly to market cap weighting, as my brain forces me to buy what's on sale and EM appears cheap compared to US stocks today, and developed international appears cheap compared to US stocks as well (though not as cheap as EM).

International investors have been waiting a very long time to be rewarded. I'm too lazy to look it up right now, but I know Vanguard's EM Index has returned around 6.5% since inception in 1994, so an OK, but hardly stunning return over nearly a quarter century. So far the higher risk of EM has not been rewarded, though logic would suggest that buying the dogs which are down & out is a better strategy than buying the most expensive stocks in the hope they become even more expensive. We are told to buy low & sell high, though we see how most do the exact opposite; think of folks who bought dot.com stocks in 1999 or a very expensive house in 2007 or Japanese stocks in 1989 or gold in 1980 or any other bubble that comes to your mind.

If anybody wants to see what happens when you pay too much for stocks, just look to Japan -- such as Vanguard Pacific Index which has produced annualized returns of under 3% over the last 28 years since inception in the summer of 1990. While I don't think the US is anywhere near as big a bubble as Japan was back at the end of 1989, I do tend to think it's overvalued and that foreign, especially EM, presents a better value at this moment in time.

We are all forced to invest in something, and we have to do the best we can, all while never knowing what the future will bring. I know that based on Shiller's CAPE Russia stands out as the cheapest market in the entire world. I will admit to owning a trivial amount of i-Shares Russia, even though the expenses are too high, the fund is VERY concentrated, and it's a nation that meddles in US elections, all run by a dictator who serves poison to those who disagree with him. Possibly a few legitimate reasons for it to be cheap.

Startled Cat
Posts: 373
Joined: Thu Apr 03, 2008 8:54 pm

Re: Doubling down on EM

Post by Startled Cat » Sat Oct 06, 2018 4:35 pm

iceport wrote:
Sat Oct 06, 2018 11:46 am
Well, I suppose you've asked — and answered — the key question here: "What if I'm wrong?"

The risk of a less comfortable retirement is not one I'd be comfortable taking, but it might be appropriate for you, depending on your circumstances.
This might be a bit hyperbolic. I think I'll manage either way. The point is that it will make a material difference.

Another point worth noting is that I have a relatively low allocation to stocks, but that stock allocation is very heavily tilted to international / EM. I can understand that is still seen as unorthodox, but perhaps it seems less crazy in that context.
JoMoney wrote:
Sat Oct 06, 2018 1:36 pm
Is there a question here? Looking for cynical responses or supportive?
I was curious to see the tone of responses, and while I expected some degree of criticism, the discussion falls a bit more to that side than I expected, which is food for thought.
UpperNwGuy wrote:
Sat Oct 06, 2018 3:43 pm
Two questions for you:
1. Why are you "very confident that these countries face a bright future"?
2. How long is "in a few decades"?
Standards of living are rising rapidly throughout the developing world (short-term blips notwithstanding). People are living happier, healthier lives. This in itself is very exciting.

Whether it translates into good returns for equityholders remains to be seen, but that's why I was careful to refer to the countries themselves, not their stockmarkets.

I often see optimism about economic growth and future progress taken almost as an article of faith when it pertains to the US. If I started a Bogleheads thread expressing doubt that the S&P 500 would be higher 30 years from now, I can guarantee you I'd get a lot of pushback. My view is similar, minus the anglocentrism. I think there's even more room for optimism in developing countries because the prospects for improvement are so tangible. People are being lifted out of poverty by the millions.

Let's say 3-4 decades.

User avatar
tooluser
Posts: 276
Joined: Sat Oct 01, 2011 7:04 pm

Re: Doubling down on EM

Post by tooluser » Sat Oct 06, 2018 5:32 pm

Emerging markets makes up 10% of my 10-speed portfolio. I'll rebalance towards 10% as necessary the next time I rebalance.
"A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness." -- Albert Einstein, just before he won the Nobel Prize.

UpperNwGuy
Posts: 1254
Joined: Sun Oct 08, 2017 7:16 pm

Re: Doubling down on EM

Post by UpperNwGuy » Sat Oct 06, 2018 5:33 pm

Startled Cat wrote:
Sat Oct 06, 2018 4:35 pm
Let's say 3-4 decades.
In other words, only younger investors will see the benefits.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Doubling down on EM

Post by watchnerd » Sat Oct 06, 2018 5:54 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably.
How heavy is heavy?

I hold roughly the market weight for EM, which is about 10% of my equities / 7% of my portfolio.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

Momus
Posts: 538
Joined: Tue Feb 21, 2012 9:23 pm

Re: Doubling down on EM

Post by Momus » Sat Oct 06, 2018 6:24 pm

sillysaver wrote:
Sat Oct 06, 2018 2:37 pm
Investors have short memories.

VWO was up 11.75% in 2016 and 31.8% in 2017. It was up from a low about $33 to 51 at the peak in January 2018, for a gain of over 50%.
So, you are saying the bottom isn't here, it has $10 left to go, it's $40 now.

Amanda999
Posts: 24
Joined: Sat Apr 22, 2017 12:48 pm
Location: Boston suburbs

Re: Doubling down on EM

Post by Amanda999 » Sat Oct 06, 2018 6:44 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
.... EM now accounts for nearly half my stock allocation (most of the rest is international DM)....
OP: Do you mean that half of your international stock allocation is EM, and most of the rest (of that int'l allocation) is DM? Or what is written: that nearly 100% of your total stock allocation is international, 50% EM, almost 50% DM, some small % US?

jclear
Posts: 106
Joined: Mon Aug 20, 2018 12:47 am

Re: Doubling down on EM

Post by jclear » Sat Oct 06, 2018 9:50 pm

UpperNwGuy wrote:
Sat Oct 06, 2018 5:33 pm
Startled Cat wrote:
Sat Oct 06, 2018 4:35 pm
Let's say 3-4 decades.
In other words, only younger investors will see the benefits.
No. Anyone might see the benefits. USA TSM could have poor relative returns for the next 1-. 3-, 5-, 10-, 20-, and 30-year periods. If we expect it to underperform over 30 years, that doesn't mean we know the underperformance will be in the last decade of it.
OP has 50% in EM; I think "I can see that, almost."
OP has 50% in international DM; I think "oh, come on, dude; don't throw your money away."

andrew99999
Posts: 122
Joined: Fri Jul 13, 2018 8:14 pm

Re: Doubling down on EM

Post by andrew99999 » Sat Oct 06, 2018 10:20 pm

UpperNwGuy wrote:
Sat Oct 06, 2018 5:33 pm
Startled Cat wrote:
Sat Oct 06, 2018 4:35 pm
Let's say 3-4 decades.
In other words, only younger investors will see the benefits.
And much more importantly, only if they don't get fed up with potentially a decade or two of under performance and sell before it's gains materialise, in which case they actually did worse than by not over weighting it in the first place. This was a point in a Reck Ferri video (bogleheads conference or something) which really hit home. Sure you can tilt to value, small, emerging and you probably will out perform (eventually), but only if you actually have the conviction to hold it for decades. If not, the simplicity of cap weighted and not messing with it would have provided better returns.

User avatar
nisiprius
Advisory Board
Posts: 37091
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Doubling down on EM

Post by nisiprius » Sat Oct 06, 2018 10:38 pm

By giving something the name "emerging markets," we are encouraging ourselves to think of it as something it isn't. It isn't a cluster of countries with similar characteristics. It is a grab-bag assortment of countries that are different from each other in almost any characteristic you care to name. Their only common element is that they aren't developed countries.

There's no way to be sure that "these countries have a bright future" in the sense of that being true of all or even most of them. It is like saying "I am confident that personal computers have a bright future" and buying stock in Apple, Tandy Radio Shack, Atari, and Commodore. Very likely the stock markets of some of those countries have a bright future and others, no so much.

The very phrase "emerging markets" reeks of marketing. Just because a country isn't a developed market now doesn't tell us that it is certain to "emerge" from that status eventually.

It's your money and your life, but I wouldn't "double down" on EM simply on the basis that "these countries have a bright future."

Can you name some specific thing about the Ukraine stock market that convinces you that it has a "bright future," other than its not being a develope market? How about Colombia?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Minderbinder
Posts: 34
Joined: Wed Feb 14, 2018 3:41 pm

Re: Doubling down on EM

Post by Minderbinder » Sat Oct 06, 2018 10:45 pm

Amazingly returns on EM index (EEM) are zero from December 2009 to today.

I was once a believer in overweighting EM myself, but I capitulated back in May and went to just a standard international weighting before it got super ugly in the space. I concluded some places are just crappy and are cheap for a reason... they face significant regulatory challenges, have weak property laws, and are otherwise unproductive.

Good luck OP... I've been tempted but am resisting the siren song now after seeing it as dead money for the last decade.

NYCwriter
Posts: 195
Joined: Thu Sep 17, 2015 12:46 am

Re: Doubling down on EM

Post by NYCwriter » Sat Oct 06, 2018 10:59 pm

sillysaver wrote:
Sat Oct 06, 2018 2:37 pm
Investors have short memories.

VWO was up 11.75% in 2016 and 31.8% in 2017. It was up from a low about $33 to 51 at the peak in January 2018, for a gain of over 50%.
Past performance says nothing about future returns.

It comes down to assessing risk toward retirement. EM has a volatility risk that at present is very real.

Valuethinker
Posts: 36728
Joined: Fri May 11, 2007 11:07 am

Re: Doubling down on EM

Post by Valuethinker » Sun Oct 07, 2018 5:55 am

Minderbinder wrote:
Sat Oct 06, 2018 10:45 pm
Amazingly returns on EM index (EEM) are zero from December 2009 to today.

I was once a believer in overweighting EM myself, but I capitulated back in May and went to just a standard international weighting before it got super ugly in the space. I concluded some places are just crappy and are cheap for a reason... they face significant regulatory challenges, have weak property laws, and are otherwise unproductive.

Good luck OP... I've been tempted but am resisting the siren song now after seeing it as dead money for the last decade.
The problems of regulation corruption governance are well understood for EM.

The question is whether that is on the stock prices. What do we know that the market does not?

I have concerns 're Chinese market valuation and state manipulation of stock prices directly and via the credit cycle.

Unfortunately the safeguards imposed in developed markets post Great Financial Crash are probably insufficient. And they are bring weakened.

So it might not be Emerging Markets that bring us our next crisis.

garlandwhizzer
Posts: 2066
Joined: Fri Aug 06, 2010 3:42 pm

Re: Doubling down on EM

Post by garlandwhizzer » Sun Oct 07, 2018 12:49 pm

One of the biggest mistakes investors make is to assume what has happened in the recent past, still fresh in their memory, will persist into the future. When it comes to asset classes whether it be value, international, EM, long bonds, commodities, etc., markets go through cycles of up and down repeatedly. It is entirely human to sell during the down cycle, often near the bottom after it's gone on for years, and to buy during the later stages of a bull market, often close to the birth of a bear market. Based on valuations, expected economic growth, and demographics, EMs have some fundamental long term economic advantages which may overcome their disadvantages (increased corruption, currency fluctuations, rule of law, lower accounting standards, etc.,). The vigorous US bull market has been running now for 9+ years and we're used to it, but that doesn't imply that we can protect persistent US outperformance relative to INTL and EM into the long term future. Instead it makes it more likely that this trend is in its late innings. A reversal in this trend will occur at some point, although when the reversal happens is not predictable. Personally, I'm holding on to about 25% EM, 25% DM, and 50% in US. Time will tell.

Garland Whizzer

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Doubling down on EM

Post by watchnerd » Sun Oct 07, 2018 12:56 pm

garlandwhizzer wrote:
Sun Oct 07, 2018 12:49 pm
One of the biggest mistakes investors make is to assume what has happened in the recent past, still fresh in their memory, will persist into the future. When it comes to asset classes whether it be value, international, EM, long bonds, commodities, etc., markets go through cycles of up and down repeatedly. It is entirely human to sell during the down cycle, often near the bottom after it's gone on for years, and to buy during the later stages of a bull market, often close to the birth of a bear market. Based on valuations, expected economic growth, and demographics, EMs have some fundamental long term economic advantages which may overcome their disadvantages (increased corruption, currency fluctuations, rule of law, lower accounting standards, etc.,). The vigorous US bull market has been running now for 9+ years and we're used to it, but that doesn't imply that we can protect persistent US outperformance relative to INTL and EM into the long term future. Instead it makes it more likely that this trend is in its late innings. A reversal in this trend will occur at some point, although when the reversal happens is not predictable. Personally, I'm holding on to about 25% EM, 25% DM, and 50% in US. Time will tell.

Garland Whizzer
I still hold EM at market weights, but while I used to be bullish on EM for demographic reasons, I'm not so sure having a young, vibrant population (that needs to be employed and fed) is a positive in an era of increasing environmental stress and emerging AI economics.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

livesoft
Posts: 63035
Joined: Thu Mar 01, 2007 8:00 pm

Re: Doubling down on EM

Post by livesoft » Sun Oct 07, 2018 1:03 pm

I liked the OP post for what I think it is: Here is someone who deep down has some doubts, so by publicly writing their reasons it helps to comfort them in their decision. I sometimes do the same thing. That is, if I publicly state I am going to do something, then there is a much better chance that I will do it than if I just kept my thoughts to myself. So stating an IPS to the world (and bogleheads.org in particular) means that one has a better chance of following through on it.

For myself, I have a market weight to EM. I don't mind owning it, but I would not overweight it until the EM ETFs that I am interested in have their RBDs. I know that other things will go up and down, just as EM ETFs do, so I would rather be in things that are going up than in EM equities that are not going up. That is, just because I have a belief that EM equities are going to go up over the next few decades does not mean that other things are not going to go up over those same decades.

Bottom line: No reason to double down on EM until there is some capitulation and some RBDs. It's OK to hold at market weights while waiting for that to happen.
Wiki This signature message sponsored by sscritic: Learn to fish.

HenrySouthernCal
Posts: 32
Joined: Thu Dec 21, 2017 11:33 pm

Re: Doubling down on EM [Emerging Market]

Post by HenrySouthernCal » Sun Oct 07, 2018 2:50 pm

I own EM index fund and I personally feel EM sector is quite risky now. I mainly focus on China as it is 1/3 of the EM index and problem in China can cause other EM country stocks to drop too.

For China it has several risks:
1) Overvalued real estate price. Chinese citizens are very jittery on property price now. Compared with U.S. in 2006, the Chinese property bubble is much bigger in terms of price, but not much in sub prime issue. With global rising interest environment, proper value in China cab be under tremendous pressure. A crash of housing price probably will crash Chinese economy.

2) Capital flight out of China is still going on since 2014. Last a few years government strict control helped stabilizing the foreign reserve, but capital outflow is still going. It was mostly the trade surplus bailed out China and actually increased foreign reserve slightly last a few years. It is hard to continue to rely on trade surplus going forward if trade war dragged onto long term.

To play international game, I'd think Japan and EU markets are safer bet than EM right now. I'd scoop up more EM when China really settles down.

heyyou
Posts: 3198
Joined: Tue Feb 20, 2007 4:58 pm

Re: Doubling down on EM [Emerging Market]

Post by heyyou » Sun Oct 07, 2018 6:20 pm

I don't care which way my EM exposure moves. It is just another slice of my equities. There's always something that is up relative to the others.

Striving for more return through allocating didn't work for me, but saving more worked well. Diligent saving plus steady long term investing will harvest the periodic gains of EM exposure, if the saver stays with the volatile allocation for several decades.

asif408
Posts: 1506
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Doubling down on EM [Emerging Market]

Post by asif408 » Sun Oct 07, 2018 9:07 pm

I have a similar portfolio to yours, around 60% EM, mostly EM value, which I've had since 2016. I respect your openness and, for the most part, agree with your reasoning. I'm not too cute with my overweight, I simply picked an allocation I can live with and looked for the cheapest and simplest way to implement it. I don't think you will get much support here for such a portfolio, but to do better than the market, your portfolio shouldn't look like everyone else's, and around these parts, that consists mostly of US stocks and bonds. So, whatever the result is for you and me, it will likely be very different from those who are 80-90% in US stocks and bonds and 10 or 20% in international stocks.

Whether that result is better or worse over the next decade or two remains to be seen, but I agree the probabilities are in our favor in the next decade or two. And I think we are both honest enough to admit we may be wrong, but we are willing to live with the risk things don't play out.

letsgobobby
Posts: 11695
Joined: Fri Sep 18, 2009 1:10 am

Re: Doubling down on EM [Emerging Market]

Post by letsgobobby » Sun Oct 07, 2018 11:12 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably. Particularly now with VWO under $40, it’s hard to resist buying EM for the long haul.

The long run of underperformance in EM has definitely been frustrating, but I think buying more is the right move. I’m very confident that these countries face a bright future and that their stock markets will collectively go much higher than their current levels in a few decades. If forced to choose, I would much rather own a reasonably-valued basket* of high-growth countries, of which many have positive demographics, than overweighting the US. Many people here have US-heavy portfolios, and I congratulate them for their impressive recent returns. But I don’t expect that outperformance to continue indefinitely.

EM now accounts for nearly half my stock allocation (most of the rest is international DM). I expect this tilt will have a big impact on the eventual returns of my portfolio. If EM does well, the tilt will pay off. If not, frankly, my retirement might be less comfortable. It’s a big bet that these economies will pull through despite their present struggles, that valuations matter, and also on the concept of purchasing power parity. In places like Taiwan, Malaysia, and South Africa, I’ve been amazed at how much local prices differ from dollar prices, even on imported products like Nespresso capsules (my personal Big Mac Index). Right now I’m on my way to India, where the rupee is at an all-time low. A large part of the recent decline has been due to exchange rate movements, but I think these currencies will tend towards PPP with the dollar over a long enough time period.

* Some might object that the EM indexes are very concentrated in China, which has demographic problems and an alleged property bubble. This is true, but I’ve made an effort to avoid cap-weighted EM indices for exactly this reason. I hold small-cap and value ETFs that are light on China, and also several country-specific ETFs. At the risk of going off on a tangent, I’m actually relatively bearish on China. I don’t think a high level of government involvement in their economy exempts them from having a business cycle, and I see them storing up imbalances that will be very painful to correct later. But I’m audacious enough to believe other countries lumped into the same category as China can do well even if China disappoints.
what funds do you use?

User avatar
nedsaid
Posts: 10688
Joined: Fri Nov 23, 2012 12:33 pm

Re: Doubling down on EM [Emerging Market]

Post by nedsaid » Sun Oct 07, 2018 11:48 pm

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
I’ve always had an EM-heavy portfolio, but during the recent decline in EM stock markets I’ve been adding to my holdings considersably. Particularly now with VWO under $40, it’s hard to resist buying EM for the long haul.

The long run of underperformance in EM has definitely been frustrating, but I think buying more is the right move. I’m very confident that these countries face a bright future and that their stock markets will collectively go much higher than their current levels in a few decades. If forced to choose, I would much rather own a reasonably-valued basket* of high-growth countries, of which many have positive demographics, than overweighting the US. Many people here have US-heavy portfolios, and I congratulate them for their impressive recent returns. But I don’t expect that outperformance to continue indefinitely.

EM now accounts for nearly half my stock allocation (most of the rest is international DM). I expect this tilt will have a big impact on the eventual returns of my portfolio. If EM does well, the tilt will pay off. If not, frankly, my retirement might be less comfortable. It’s a big bet that these economies will pull through despite their present struggles, that valuations matter, and also on the concept of purchasing power parity. In places like Taiwan, Malaysia, and South Africa, I’ve been amazed at how much local prices differ from dollar prices, even on imported products like Nespresso capsules (my personal Big Mac Index). Right now I’m on my way to India, where the rupee is at an all-time low. A large part of the recent decline has been due to exchange rate movements, but I think these currencies will tend towards PPP with the dollar over a long enough time period.

* Some might object that the EM indexes are very concentrated in China, which has demographic problems and an alleged property bubble. This is true, but I’ve made an effort to avoid cap-weighted EM indices for exactly this reason. I hold small-cap and value ETFs that are light on China, and also several country-specific ETFs. At the risk of going off on a tangent, I’m actually relatively bearish on China. I don’t think a high level of government involvement in their economy exempts them from having a business cycle, and I see them storing up imbalances that will be very painful to correct later. But I’m audacious enough to believe other countries lumped into the same category as China can do well even if China disappoints.
I like your thinking here. I too like Emerging Markets but this is a risky asset class and at some point too much is too much. I also agree with your bearishness on China, I view it as Japan on steroids. Emerging Markets are cheap here and the valuations are compelling, I just wouldn't overdo it. Emerging Markets are nicknamed Submerging Markets for a good reason. They are very risky and volatile and can disappoint for several years at a time.

My approach is to buy solid core investments that you can own forever. I have an adventuresome side too and like to add higher risk, higher reward investments that I call "Tiger in the Tank" investments. Problem is, you don't want to add so much octane to your portfolio that you risk blowing it up. I do not favor extreme portfolio tilting.

My maximum recommendation for International Stocks for a stock portfolio is 50%. My maximum recommendation for Emerging Markets is 50% of your International Stock allocation. So I could envision a stock portfolio that is 50% US, 25% International Developed Markets, and 25% Emerging Markets. That is as high of allocation to Emerging Markets as I would go.
A fool and his money are good for business.

HEDGEFUNDIE
Posts: 1249
Joined: Sun Oct 22, 2017 2:06 pm

Re: Doubling down on EM [Emerging Market]

Post by HEDGEFUNDIE » Sun Oct 07, 2018 11:55 pm

A friendly suggestion for those who are extreme tilting EM to also hold a substantial portion of long US treasuries as well. The largest risk to EM stocks is the “flight to safety” which is generally a flight to US treasuries. Holding 50% EM 50% Treasuries would significantly reduce volatility.

User avatar
watchnerd
Posts: 1432
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Doubling down on EM [Emerging Market]

Post by watchnerd » Mon Oct 08, 2018 12:50 am

HEDGEFUNDIE wrote:
Sun Oct 07, 2018 11:55 pm
A friendly suggestion for those who are extreme tilting EM to also hold a substantial portion of long US treasuries as well. The largest risk to EM stocks is the “flight to safety” which is generally a flight to US treasuries. Holding 50% EM 50% Treasuries would significantly reduce volatility.
Not from what I've seen on Portfolio Visualizer. 50/50 splits of:

EM + Long T = 11.39% Std Dev / 8.34% CAGR
EM + Int T = 10.99% Std Dev / 7.12% CAGR

LT certainly helped returns, though.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

HEDGEFUNDIE
Posts: 1249
Joined: Sun Oct 22, 2017 2:06 pm

Re: Doubling down on EM [Emerging Market]

Post by HEDGEFUNDIE » Mon Oct 08, 2018 12:58 am

watchnerd wrote:
Mon Oct 08, 2018 12:50 am
HEDGEFUNDIE wrote:
Sun Oct 07, 2018 11:55 pm
A friendly suggestion for those who are extreme tilting EM to also hold a substantial portion of long US treasuries as well. The largest risk to EM stocks is the “flight to safety” which is generally a flight to US treasuries. Holding 50% EM 50% Treasuries would significantly reduce volatility.
Not from what I've seen on Portfolio Visualizer. 50/50 splits of:

EM + Long T = 11.39% Std Dev / 8.34% CAGR
EM + Int T = 10.99% Std Dev / 7.12% CAGR

LT certainly helped returns, though.
I was comparing the volatility of 50/50 EM/LT with 100% EM.

Given these guys clearly care more about returns than volatility, I'd say my suggestion is still a good one.

Valuethinker
Posts: 36728
Joined: Fri May 11, 2007 11:07 am

Re: Doubling down on EM [Emerging Market]

Post by Valuethinker » Mon Oct 08, 2018 5:18 am

HenrySouthernCal wrote:
Sun Oct 07, 2018 2:50 pm
I own EM index fund and I personally feel EM sector is quite risky now. I mainly focus on China as it is 1/3 of the EM index and problem in China can cause other EM country stocks to drop too.

For China it has several risks:
1) Overvalued real estate price. Chinese citizens are very jittery on property price now. Compared with U.S. in 2006, the Chinese property bubble is much bigger in terms of price, but not much in sub prime issue. With global rising interest environment, proper value in China cab be under tremendous pressure. A crash of housing price probably will crash Chinese economy.
China may have a sub prime problem. The shadow banking system problem in China is huge, and includes peer to peer lending. There's a lot of leverage in China that is not going through the banking system. For example companies issuing bonds, and then investing in property. Much like Japan 1989 it appears that a significant proportion of Chinese corporate profits (even for non financials) might be trading on properties.

I think the murkiness of what is really going on in China is a key risk. Down to GDP statistics which are obviously made up.
2) Capital flight out of China is still going on since 2014. Last a few years government strict control helped stabilizing the foreign reserve, but capital outflow is still going. It was mostly the trade surplus bailed out China and actually increased foreign reserve slightly last a few years. It is hard to continue to rely on trade surplus going forward if trade war dragged onto long term.
Even US protective measures do not in themselves cause China's trade surplus to disappear. Apple does not currently have another place to assemble iphones. The US does not directly compete with China in a lot of areas of manufactured goods - the 2 countries have specialized on their areas of comparative advantage, and global supply chains are integrated - components are made, imported to China, assembled and exported to the US (or intermediate countries, and then exported to USA). Think Intel - it is an American company, that makes chips in the USA and other countries, which are then exported to Chinese electronics assemblers, who then build computers and export them to USA. So was my desktop PC CPU made in America? Or somewhere in SE Asia? Israel? I don't know.

What the US measures do, probably, is shift exports to the USA to other countries that are not directly hit by the measures. Also Chinese companies will cut prices (or US companies raise them) - that's historically what has happened.

Think of it another way, an import tariff is the equivalent of an exchange rate rise (for the exporting country). Due to the J Curve effect that actually *increases* the deficit of the importing country in the short run (demand is price inelastic in the short run). And when Japan had a rising exchange rate in the 1980s, Japanese companies buckled down, cut costs and held on to market share. In time, I expect Chinese companies will open up "transplant" factories in USA & Mexico, just as Japanese companies did in the last 30 years.

China's trade surplus is falling because of rising domestic consumption and because China is no longer the cheapest place to manufacture. Production has been reshoring/ onshoring to Mexico, for example, as Mexican workers are no longer expensive on a productivity adjusted basis (including lower transport costs/ easier Just In Time trade flows) compared to Chinese.
To play international game, I'd think Japan and EU markets are safer bet than EM right now. I'd scoop up more EM when China really settles down.
It appears the authorities in China have unleashed another credit cycle. However this is the same problem the developed world is in - with each credit cycle it takes more dollars of credit to generate the same GDP growth. Financialization in other words has a saturation point. This credit cycle will not produce as much GDP growth as the one after 2008. That means the Non Performing Loans problem with be greater and the need for restructuring in the property sector and the state owned enterprises (SOEs) and especially banks the ever greater.

China's stock market is likely to be a roller coaster between the unwinding of the asset bubble and the desire of the Party to keep stock markets from crashing (but also to curb rank speculation).

User avatar
randomizer
Posts: 1540
Joined: Sun Jul 06, 2014 3:46 pm

Re: Doubling down on EM [Emerging Market]

Post by randomizer » Mon Oct 08, 2018 5:30 am

That is one hell of a "tilt". Personally I am tilted, but much less (EM is about 14% of my equities, more than the 10% it would be if I weren't tilted). If EM does better than the rest of the world moving forward, I will cash in the wins and gradually undo the tilt. Last month, my EM fund went up 1.967% but my other equities only went up 1.339%. I'll be very interested to see what happens over the next 1, 2, 5, 10 years.
87.5:12.5, EM tilt — HODL the course!

Startled Cat
Posts: 373
Joined: Thu Apr 03, 2008 8:54 pm

Re: Doubling down on EM [Emerging Market]

Post by Startled Cat » Mon Oct 08, 2018 9:20 am

asif408 wrote:
Sun Oct 07, 2018 9:07 pm
I have a similar portfolio to yours, around 60% EM, mostly EM value, which I've had since 2016. I respect your openness and, for the most part, agree with your reasoning. I'm not too cute with my overweight, I simply picked an allocation I can live with and looked for the cheapest and simplest way to implement it. I don't think you will get much support here for such a portfolio, but to do better than the market, your portfolio shouldn't look like everyone else's, and around these parts, that consists mostly of US stocks and bonds. So, whatever the result is for you and me, it will likely be very different from those who are 80-90% in US stocks and bonds and 10 or 20% in international stocks.

Whether that result is better or worse over the next decade or two remains to be seen, but I agree the probabilities are in our favor in the next decade or two. And I think we are both honest enough to admit we may be wrong, but we are willing to live with the risk things don't play out.
Very interesting. This sounds like a more extreme tilt than mine. I just looked and my stock allocation is 43% EM. As I noted before, I have a relatively low allocation to stocks in general. I wish you luck, of course, and I'm glad you shared your perspective.
letsgobobby wrote:
Sun Oct 07, 2018 11:12 pm
what funds do you use?
Some of my EM exposure comes from VXUS / IXUS total-international funds.

I do own some VWO, but less than I used to.

Most of my recent purchases have gone to EWX (small cap) and FNDE (value), split roughly evenly. They have relatively high ERs and this is becoming a concern for me as I'm starting to have significant assets in those funds. On the other hand, they are both relatively light on China, which I see as a big positive. It isn't easy to replicate what they do for a small number of basis points (though I'd welcome suggestions!).

I also have a collection of country-specific and regional ETFs that I assembled in 2017. I haven't been adding to them, but I plan to hold them long-term. These also have ERs on the high side.
HEDGEFUNDIE wrote:
Sun Oct 07, 2018 11:55 pm
A friendly suggestion for those who are extreme tilting EM to also hold a substantial portion of long US treasuries as well. The largest risk to EM stocks is the “flight to safety” which is generally a flight to US treasuries. Holding 50% EM 50% Treasuries would significantly reduce volatility.
I can see that it might dampen volatility, but at the cost of adding other risks to the picture. I like the 50% EM 50% Treasuries concept, and in fact I do hold a lot of Treasuries and high-grade munis, but I'm not sure about taking on substantial term risk.

jclear
Posts: 106
Joined: Mon Aug 20, 2018 12:47 am

Re: Doubling down on EM [Emerging Market]

Post by jclear » Mon Oct 08, 2018 9:33 am

watchnerd wrote:
Mon Oct 08, 2018 12:50 am
HEDGEFUNDIE wrote:
Sun Oct 07, 2018 11:55 pm
A friendly suggestion for those who are extreme tilting EM to also hold a substantial portion of long US treasuries as well. The largest risk to EM stocks is the “flight to safety” which is generally a flight to US treasuries. Holding 50% EM 50% Treasuries would significantly reduce volatility.
Not from what I've seen on Portfolio Visualizer. 50/50 splits of:

EM + Long T = 11.39% Std Dev / 8.34% CAGR
EM + Int T = 10.99% Std Dev / 7.12% CAGR

LT certainly helped returns, though.
Try it with more equity.
https://www.portfoliovisualizer.com/bac ... tion3_3=25
Emphasis on long bonds is for when you have high equity and want to get the most diversity bang for your bond.
Lower equity suggests starting to mix in intermediates or TIPS.
https://www.portfoliovisualizer.com/bac ... tion3_3=40

staythecourse
Posts: 6221
Joined: Mon Jan 03, 2011 9:40 am

Re: Doubling down on EM [Emerging Market]

Post by staythecourse » Mon Oct 08, 2018 9:38 am

heyyou wrote:
Sun Oct 07, 2018 6:20 pm
I don't care which way my EM exposure moves. It is just another slice of my equities. There's always something that is up relative to the others.

Striving for more return through allocating didn't work for me, but saving more worked well. Diligent saving plus steady long term investing will harvest the periodic gains of EM exposure, if the saver stays with the volatile allocation for several decades.
Agreed. This should be stickied. I am agnostic on ANY of my subassets. If EM is up or down doesn't matter any more then REIT or TSM or ....

I control what I can control. The biggest lever is EASILY saving. Kudos for understanding that.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

TIAX
Posts: 1180
Joined: Sat Jan 11, 2014 12:19 pm

Re: Doubling down on EM [Emerging Market]

Post by TIAX » Mon Oct 08, 2018 9:48 am

Startled Cat wrote:
Sat Oct 06, 2018 11:21 am
EM now accounts for nearly half my stock allocation (most of the rest is international DM).
So you have nearly no U.S, stocks? Not a great idea.

Valuethinker
Posts: 36728
Joined: Fri May 11, 2007 11:07 am

Re: Doubling down on EM [Emerging Market]

Post by Valuethinker » Tue Oct 09, 2018 5:09 am

Startled Cat wrote:
Mon Oct 08, 2018 9:20 am
asif408 wrote:
Sun Oct 07, 2018 9:07 pm
I have a similar portfolio to yours, around 60% EM, mostly EM value, which I've had since 2016. I respect your openness and, for the most part, agree with your reasoning. I'm not too cute with my overweight, I simply picked an allocation I can live with and looked for the cheapest and simplest way to implement it. I don't think you will get much support here for such a portfolio, but to do better than the market, your portfolio shouldn't look like everyone else's, and around these parts, that consists mostly of US stocks and bonds. So, whatever the result is for you and me, it will likely be very different from those who are 80-90% in US stocks and bonds and 10 or 20% in international stocks.

Whether that result is better or worse over the next decade or two remains to be seen, but I agree the probabilities are in our favor in the next decade or two. And I think we are both honest enough to admit we may be wrong, but we are willing to live with the risk things don't play out.
Very interesting. This sounds like a more extreme tilt than mine. I just looked and my stock allocation is 43% EM. As I noted before, I have a relatively low allocation to stocks in general. I wish you luck, of course, and I'm glad you shared your perspective.
40% of that is China?

So 43% EM is 16% in China. That's a big overweighting.

I can see that it might dampen volatility, but at the cost of adding other risks to the picture. I like the 50% EM 50% Treasuries concept, and in fact I do hold a lot of Treasuries and high-grade munis, but I'm not sure about taking on substantial term risk.
The issue being that rising US interest rates is also when EM tend to do badly.

We know this cycle that ultra low interest rates, for longer than any previous time in history, has led to movements to risk asset classes aka "risk on". Hyman Minsky again - unusual stability begats greater risk taking. The background temperature of the experiment has been rising again (just as it did in the lead up to 2007, when US housing finance started hitting the fan).

And that has meant EM bonds, the purest measure of EM macro risk (bundling up credit risk, political risk etc.) came to record low levels of yield spread against the safe US Treasury. And commodity producers soared (and crashed) as China unleashed the greatest construction boom in world history (something like in 8 years the Chinese poured more cement than the USA in the 20th century (including the Interstate Highway System, which up to then was the largest human project in history, taking 30 years to complete etc.)

So as the Fed tightens, the hot money flows out of EM assets.

That's where we are now, and we are in some sense at the beginning of an unwind of the largest carry trade in history (borrow at or near the US risk free rate, invest in any and everything at a higher yield). Shades of 1994 the "annubis horribulis" of bond market investors (from memory, the 30 year US Treasury zero coupon bond dropped -30% that year).

(It was also the year of the Mexico crisis, from memory - EM dropped by 50%+).

It means the "barbell" portfolio of long US Treasuries and EM could put your portfolio in the 2 worst asset classes?

MichCPA
Posts: 309
Joined: Fri Jul 06, 2018 9:06 pm

Re: Doubling down on EM [Emerging Market]

Post by MichCPA » Tue Oct 09, 2018 8:27 am

I have thought about getting into more international stocks and specifically about EM as well. When I do research the major drawback is that most international ETFs currently show negative sales growth. Sales growth is the best predictor of long term profit so I have been wary of pulling the trigger. As others have mentioned EM also does worse when US interest rates rise. I am kicking the tires on buying developed pacific etfs like VPL (mostly Japan, S Korea, and Australia) because it has sales growth, although the P/E is a bit higher than EM or Europe.

KJVanguard
Posts: 74
Joined: Fri Oct 05, 2018 3:39 am

Re: Doubling down on EM [Emerging Market]

Post by KJVanguard » Thu Oct 11, 2018 10:25 pm

I assume we have all read "Stocks For The Long Run" which gives us a biased history as written by the winner.

Keep in mind that when the his tale starts in 1802 the US (the ultimate winner for the next couple centuries) was itself a mere frontier market. What investor would touch US stocks in 1812 when British troops were in the process of burning down the White House?

Talk about turmoil and political uncertainty! One could not even feel sure the US would continue to exist. Seems you sometimes get rewarded for investing in a frontier market. Now if you invested in the Russian stock market in 1915, well, things didn't go so great.

Post Reply