Does Emerging Markets make sense?

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unclescrooge
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Re: Does Emerging Markets make sense?

Post by unclescrooge » Sat Feb 08, 2020 1:06 pm

Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
unclescrooge wrote:
Sat Feb 08, 2020 12:18 pm
Anon9001 wrote:
Sat Feb 08, 2020 11:53 am
alex_686 wrote:
Fri Feb 07, 2020 5:47 pm
Anon9001 wrote:
Fri Feb 07, 2020 11:20 am
MSCI EM still has 82% exposure to EM:http://i.imgur.com/mgbpqov.png
I am missing a couple of steps here.

Historically equities have had low currency risk. 80%+ of yearly FX movement is tied to inflation. Equities are a excellent hedge against inflation. Over the past 100+ years, currency risk has run around 1% volatility, across all currency pairs. Because of Purchasing Power Parity, this risk means reverts to 0 for long holdings periods.

Next, what are you trying to show with your graph? Why would holding a diverse set of EM currency risk be uniquely risky? Also, your graph misleads. The majority of EM revenue to other EM companies in the supply chain. IIRC, every iPhone generates 7x of its value in cross country revenue.

For example, from a USD viewpoint, what is the FX risk on earnings of investing in a Vietnamese chip test & packaging company that buys chips from Korea and sells them on to China to produce a iPhone? Lots of revenue as the supply chain crosses boarders, but not much earnings.
Okay let's assume EM is multinationals like you said from your point of view what is the point in owning them? You are owning more volatile stocks with high correlation to your local equities. Sure they can deliver higher return in the not too distant future maybe but there is a high chance they won't. Risk and return do not have a strong relationship. Low Volatility Equities have outperformed EM significantly despite it being less volatile.
Over what time period?
Low volatility funds haven't been around for all that long. Are you saying the history is long enough to make an informed decision? If not, you seem to be cherry picking your data points.
You can use PortfolioVisualizer and compare USMV and VTSMX compared to VTSMX and IEMG. Data is only 8 years unfortunately. I do not think EM stocks can outperform significantly due to their high China exposure. Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
I think EM will outperform because of their China exposure.

50% of my stock exposure is international, 50% of that is EM. And 50% is direct exposure in China via non state owned company ETF. This gives it an indirect tilt towards tech companies.

It was up 38% last year.

The bias on the board against EM gives me faith it will do well. :mrgreen:

alex_686
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Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 08, 2020 1:08 pm

Anon9001 wrote:
Sat Feb 08, 2020 11:50 am
You have to make a judgement call on the currency risk. EM has not been around long enough for there to be studies done on currency risk of owning EM equities.
This is not true. There are robust studies that go back when the US was in the “emerging markets” category. It is a nice example where theory and practice matches.

alex_686
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Re: Does Emerging Markets make sense?

Post by alex_686 » Sat Feb 08, 2020 1:20 pm

Anon9001 wrote:
Sat Feb 08, 2020 11:53 am
Okay let's assume EM is multinationals like you said from your point of view what is the point in owning them? You are owning more volatile stocks with high correlation to your local equities. Sure they can deliver higher return in the not too distant future maybe but there is a high chance they won't. Risk and return do not have a strong relationship. Low Volatility Equities have outperformed EM significantly despite it being less volatile.
First, you are changing your argument. There is not much currency risk. This is not the area where risk is coming from. This does not mean that there is no risk. Political risk still exist for example.

Second, while EM are decoupling from specify country risk there is still risk. Global snd sector risk dominates over country risk. EM companies tend to loaf on small, growth, and technological sector factors, which carries higher risk.

The volatility thing is a bit more complex then you suggest. Volatility drag is a real thing and I favor low volatility funds due to macroeconomic issues. this is a debatable point. But once again, currency and country issues are a minor part of overall risk.

EM was a major statically significant flag 20 years ago. Now it has dropped to 2nd or 3rd place and is continuing to fall.

Schlabba
Posts: 341
Joined: Sat May 11, 2019 9:14 am

Re: Does Emerging Markets make sense?

Post by Schlabba » Sat Feb 08, 2020 2:00 pm

Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
unclescrooge wrote:
Sat Feb 08, 2020 12:18 pm
Anon9001 wrote:
Sat Feb 08, 2020 11:53 am
alex_686 wrote:
Fri Feb 07, 2020 5:47 pm
Anon9001 wrote:
Fri Feb 07, 2020 11:20 am
MSCI EM still has 82% exposure to EM:http://i.imgur.com/mgbpqov.png
I am missing a couple of steps here.

Historically equities have had low currency risk. 80%+ of yearly FX movement is tied to inflation. Equities are a excellent hedge against inflation. Over the past 100+ years, currency risk has run around 1% volatility, across all currency pairs. Because of Purchasing Power Parity, this risk means reverts to 0 for long holdings periods.

Next, what are you trying to show with your graph? Why would holding a diverse set of EM currency risk be uniquely risky? Also, your graph misleads. The majority of EM revenue to other EM companies in the supply chain. IIRC, every iPhone generates 7x of its value in cross country revenue.

For example, from a USD viewpoint, what is the FX risk on earnings of investing in a Vietnamese chip test & packaging company that buys chips from Korea and sells them on to China to produce a iPhone? Lots of revenue as the supply chain crosses boarders, but not much earnings.
Okay let's assume EM is multinationals like you said from your point of view what is the point in owning them? You are owning more volatile stocks with high correlation to your local equities. Sure they can deliver higher return in the not too distant future maybe but there is a high chance they won't. Risk and return do not have a strong relationship. Low Volatility Equities have outperformed EM significantly despite it being less volatile.
Over what time period?
Low volatility funds haven't been around for all that long. Are you saying the history is long enough to make an informed decision? If not, you seem to be cherry picking your data points.
You can use PortfolioVisualizer and compare USMV and VTSMX compared to VTSMX and IEMG. Data is only 8 years unfortunately. I do not think EM stocks can outperform significantly due to their high China exposure. Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
:oops:

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watchnerd
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Location: Seattle, WA, USA

Re: Does Emerging Markets make sense?

Post by watchnerd » Sat Feb 08, 2020 3:59 pm

Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
I do not think EM stocks can outperform significantly due to their high China exposure. Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
Then just buy an ex-China fund like EMXC.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

fennewaldaj
Posts: 847
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Re: Does Emerging Markets make sense?

Post by fennewaldaj » Sat Feb 08, 2020 11:52 pm

Schlabba wrote:
Sat Feb 01, 2020 4:20 pm
unclescrooge wrote:
Sat Feb 01, 2020 4:01 pm
Trader Joe wrote:
Fri Jan 31, 2020 5:29 pm
empe wrote:
Fri Jan 31, 2020 3:40 pm
I've been investing in ETFs that track MSCI World and MSCI Emerging Markets, but for some time I've been thinking if Emerging Markets really makes sense at all on the conceptual level.

MSCI World index includes 23 developed markets while MSCI Emerging Markets index includes 26 emerging markets. If I've understood correctly, MSCI decides which market is considered as developed and which as emerging. In some occasions, a market can change index, and not always for the better.

If we think that MSCI World is the top 23 markets in the world and MSCI Emerging Markets includes the 26 markets that follow, what's the point in investing in Emerging Markets? When a market improves, it will reach the point when it's taken from EM index to World, essentially making World index the premium collection and EM the "farm league".

So is investing in Emerging Markets basically by definition investing in the losing markets as the better ones will eventually leave the index?
Welcome to the forum. No, it never makes sense to invest in Emerging Markets.
So it makes sense to ignore 90% of the world's population in your so-called passive investing portfolio?

You're also ignoring the second largest economy in the world, and our largest trading partner.

It's not necessary to include everything in your portfolio, but deliberately excluding a major asset class from a market cap weighed passive portfolio really doesn't make sense.
John Bogle recommended a 100% developed market portfolio for american investors, clearly he didn't make sense. :oops:

You don't need emerging markets. If you leave them out it will have a minimal impact on your investment returns. We're talking about +/-12% of global market cap here.
Much more important are savings rate, asset allocation and staying the course.
Although Bogle was never that excited about international investment if anything he seemed to prefer and EM overweight in your international if you are going to do it invest internationally. That is the impression I got from his book anyway.

xerxes101
Posts: 147
Joined: Sat Oct 14, 2017 11:25 am

Re: Does Emerging Markets make sense?

Post by xerxes101 » Sun Feb 09, 2020 3:24 am

Roughly 5% of my total portfolio is invested in emerging markets index funds.
There are only 4 EM ETFs I have been interested in:

VWO: Vanguard EM, expenses are at 12 basis points trades high volume...one of the most popular EM ETF, you don't get screwed on the spreads
DVYE: This is a high dividend EM ETF. I invested in this fund for a while because (1) I usually do DCA with high volatility ETFs and I consider EM ETFs to be high volatility (2) At the time DVYE was trading commission-free only at Fidelity which made this strategy convenient (3) High dividends with this fund made it more bearable to "wait and see"... I eventually traded out of this fund, because I consider the expenses to be too high at 49 basis points
SCHE: 13 basis points..convenience of trading commission free at Schwab (not a factor any longer)
SPEM: Right now this is my favorite EM ETF because it has the lowest expenses at 11 basis points. It used to get a 4* from Morningstar vs 3* for VWO and SCHE but this changed recently.

alex_686
Posts: 5296
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does Emerging Markets make sense?

Post by alex_686 » Sun Feb 09, 2020 8:43 am

fennewaldaj wrote:
Sat Feb 08, 2020 11:52 pm
Although Bogle was never that excited about international investment if anything he seemed to prefer and EM overweight in your international if you are going to do it invest internationally. That is the impression I got from his book anyway.
I think we cam dismiss this argument.

20 years ago when Bogle was thinking about this the classic EM play was to buy shares in the national telephone company or Coke Cola distributer. There was a nice clear regression between GNP and share returns.

Today the classic play is to invest in a light manufacturing company that buys parts from another EM county to make sub-assembles for phones in another EM country, that will be sold globally. And they will likely have a manufacturing plant in another EM country to control risk. And they may have bought a DM company for research and marketing. There is now a nice regression between EM stocks and their sector.

The market structure has changed. Bogle’s logic can’t hold anymore.

caklim00
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Joined: Mon May 26, 2008 10:09 am

Re: Does Emerging Markets make sense?

Post by caklim00 » Sun Feb 09, 2020 8:58 am

Stef wrote:
Sat Feb 01, 2020 11:26 pm
Any good FM ETF?
I've heard of FRN, but I've never invested in one of these funds.

I'd rather get my thrills from EM Value.

Elysium
Posts: 2146
Joined: Mon Apr 02, 2007 6:22 pm

Re: Does Emerging Markets make sense?

Post by Elysium » Sun Feb 09, 2020 9:19 am

Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
You believe corporations controlling government is a better model than government controlling corporations? Interesting.

Anon9001
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Re: Does Emerging Markets make sense?

Post by Anon9001 » Sun Feb 09, 2020 9:24 am

Elysium wrote:
Sun Feb 09, 2020 9:19 am
Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
You believe corporations controlling government is a better model than government controlling corporations? Interesting.
Of course I have seen many businesses here like Air India which is losing money heavily yet they are subsidised by state to keep it afloat. A private company Jet Airways just went bankrupt even though it had less losses than Air India. The worry with China is that they are doing the same thing. Keeping many businesses who are losing money heavily afloat because they are owned by the state. Zombie companies if you will. It already happened to Japan.

Elysium
Posts: 2146
Joined: Mon Apr 02, 2007 6:22 pm

Re: Does Emerging Markets make sense?

Post by Elysium » Sun Feb 09, 2020 10:02 am

Anon9001 wrote:
Sun Feb 09, 2020 9:24 am
Elysium wrote:
Sun Feb 09, 2020 9:19 am
Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
You believe corporations controlling government is a better model than government controlling corporations? Interesting.
Of course I have seen many businesses here like Air India which is losing money heavily yet they are subsidised by state to keep it afloat. A private company Jet Airways just went bankrupt even though it had less losses than Air India. The worry with China is that they are doing the same thing. Keeping many businesses who are losing money heavily afloat because they are owned by the state. Zombie companies if you will. It already happened to Japan.
You missed my point entirely, because you assumed government control is same as government ownership. I asked if you like corporations controlling the government. This is the extreme form of supply side economics in US and one that some other countries are trying to follow thinking it will help them grow. It will help grow the corporations get bigger, and have a say in governance so much that people will have lost their say in their government. Chinese have formed a successful method to bring their country out of poverty and power growth to become a superpower. They do not own corporations outright and let the losing ones hang around. They would let the corporations that aren't successful fail, and not be a burden on the state. But they aren't going to let the free market capitalization model of extreme supply side economics control them. This is not a model that will provide success for them, instead they have their own model.

Valuethinker
Posts: 39415
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Re: Does Emerging Markets make sense?

Post by Valuethinker » Tue Feb 11, 2020 10:20 am

Anon9001 wrote:
Sun Feb 09, 2020 9:24 am
Elysium wrote:
Sun Feb 09, 2020 9:19 am
Anon9001 wrote:
Sat Feb 08, 2020 12:30 pm
Whenever China becomes a free market that respects rights of minority shareholders that is when EM will outperform.
You believe corporations controlling government is a better model than government controlling corporations? Interesting.
Of course I have seen many businesses here like Air India which is losing money heavily yet they are subsidised by state to keep it afloat. A private company Jet Airways just went bankrupt even though it had less losses than Air India. The worry with China is that they are doing the same thing. Keeping many businesses who are losing money heavily afloat because they are owned by the state. Zombie companies if you will. It already happened to Japan.
It seems that for a lot of basic industries, heavily owned by Chinese state & local governments, that is precisely what they are doing. Zombie companies - but which keep flooding world markets with cheap steel, aluminum etc. Also zombie real estate developments - homes and offices built that will never be occupied.

And the entire Chinese financial system is sitting on a truly huge amount of credit, and possibly an equivalently large bad debt problem.

India. The State Owned Banks are a real locus of trouble. There re others - such as the electricity generation sector (generators and distributors who never get paid; excess generation capacity + new capacity still being built). Historically, private sector companies and individuals in India have always been wary of debt, so I believe the issues there are much less severe than in China.

The problems in India are structural & infrastructural. Remains to be seen if it can break out of those constraints. Also whether the manufacturing outsourcing boom, propelled by globalisation of supply chains, which China rode to success, is still a window that's open for other countries to follow. It's been done, and it may not be doable again but another country (although Chinese manufacture is, in part, moving to Vietnam).

Anon9001
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Location: भारत

Re: Does Emerging Markets make sense?

Post by Anon9001 » Thu Feb 13, 2020 7:09 am

If you are looking to invest in Emerging Markets don't add currency risk along with equity risk. In a recession the currencies of the EM stocks you are invested in will go down also. I would not bet on mean reversion considering USD is reserve currency and no EM currency even the Yuan is even slightly close to reserve currency status. HEEM etf for USA investor looks to be a good buy.

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