Ignore Emerging Markets at Your Peril
Time Is Round And Rolls Quickly
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We live in a highly interconnected world. Case in point is the ongoing discussion in the news of what would happen should Iran’s oil shipments to the United States cease. If you need another example, simply look on the tag on your shirt. I bet it says something like “Made in China” or another foreign country. Even the fresh fruit in grocery stores sometimes comes from Ecuador, Brazil or other nations where the growing season is opposite the United States.
This interconnected nature of our world makes it all the more surprising to see the news media only talk about the stock markets in the United States and other developed countries. Obviously your local network affiliate has finite time for their newscast, and I’m not suggesting they delve deeply into business news. However, the beginning investor watching this newscast might not even consider there are stocks traded outside the developed world of the United States and Europe.
This ignorance may put your portfolio in peril. The United States economy, for example, has been lucky to eke out 3% growth over the past few quarters. The United Kingdom’s economy has averaged less than 1% growth in the past few quarters. Europe as a whole actually contracted 0.3% in the fourth quarter of 2011.
These economic growth numbers are pathetic. The United States is the world’s largest economy, but it by far does not offer the greatest profit potential for the average investor. Now, I’m not saying you can’t make a fortune by investing only in U.S., U.K., or European stocks. It’s entirely possible to do that, in fact.
However, wouldn’t you rather put some of your money in the places where it’s most likely to grow the fastest?
What if I told you there were markets with historical growth rates of 6%, 8% and even 10%? Yes, these markets do exist … places where the economic growth has outstripped that of the United States by a factor of three in the past and is projected to continue its increase over the next few decades. In fact, investment firm Goldman Sachs released a report in 2006 that projected the four main markets in this class to increase 879%, 1,137%, 2,432% and 2,550% by the year 2050.
The countries I’m talking about are known as “emerging markets” in investment parlance. They’re called this because they’re experiencing periods of rapid industrialization and economic growth, and “emerging” as centers of market capitalism.
There are more than 25 emerging-markets nations throughout the world, but the four big ones are known as the BRIC countries. “BRIC” stands for Brazil, Russia, India and China, and they’re the four nations whose 2006 to 2050 economic growth numbers I mentioned above.
There is phenomenal growth potential in the BRIC countries and other emerging markets. The economies in these countries are growing like wildfire, and their business communities need more and more capital to keep growing.
As with any area that has a high potential for profit, however, the emerging markets also have a higher risk. Egypt is on the list of emerging-markets nations, for example, and the protests that brought the country to a standstill in early 2011 had a detrimental effect on foreign investment. The instability of governments in emerging-markets nations is a very real hurdle when considering putting your money into one of those economies.
How then to manage the considerable risk of investing in emerging markets while also maximizing your gains?
One option is, of course, to pick a country and start learning everything about their public companies. What exchanges are the stocks traded on? What are the fundamentals? How good is the growth rate?
The exchange question is of particular interest. If you’re a U.S. investor and you want to put money into a Chinese stock, for example, you in many cases have two choices for how to invest. If the company is listed on a U.S. exchange, you can purchase their American Depositary Shares (ADRs). You could also purchase their shares listed on any of the exchanges in China–Shenzen or Shanghai for the mainland or the Hong Kong exchange. However, buying the ADRs on the U.S. exchange would protect you from any foreign currency risk.
The downside of the research method is it takes a lot of time before you find yourself ready to dive into a stock from one of the emerging-markets nations. Should you want to take the plunge sooner, I suggest following the advice of Paul Goodwin, editor of Cabot China & Emerging Markets Report. Paul’s edited this newsletter since 2005, and has spent the past 20 years watching China and other emerging-markets nations.
Paul’s recommendations have made Cabot subscribers a lot of money over the years, while offering a classic growth-investor method of getting into emerging markets. His recommendations are all ADRs listed on U.S. exchanges, so you don’t have to worry about foreign currency risk. Plus, as a subscriber you can email Paul any time to ask questions about emerging markets and specific stocks.
Click here to learn more about putting Cabot China & Emerging Markets Report to work for you.
With all this talk about the high growth potential of emerging-markets stocks, I have two more numbers for you to consider. One is 80%; that’s how much of the world’s population lives in emerging-market nations. The other is 30%; that’s their contribution to the world economy now … which means there’s huge potential!
Investing in an emerging market is not for everyone. If you love growth stocks and the roller-coaster ride of that investing style, then by all means dive right into a stock from one of the BRIC nations. Conservative or buy-and-hold investors, on the other hand, might show a tad more reluctance, which is perfectly fine.
No matter your investing style though, putting your money in emerging markets will put you on the forefront of growing the global economy. And that’s pretty darn cool.
Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Time Is Round And Rolls Quickly
A lot of things connected with time are round: the earth, the moon, a watch, a sundial. And time is cyclical, by the solar cycle, the lunar cycle, and the earth’s cycle. As to the speed of time, the older we get, the faster it seems to pass. The more we can be aware of these truths, the better we can appreciate and make use of the time we have today.
In this week’s video, Cabot China & Emerging Markets Report Editor Paul Goodwin says it’s been another good week in the markets. There’s no way to avoid this is a bull market, Paul says, and it’s high time to increase your exposure to growth stocks. Featured stocks: CA Inc. (CA), Celgene (CELG), Cummins (CMI), Eastman Chemical (EMN), Francesca’s (FRAN), Jabil Circuit (JBL), Lululemon (LULU), Monster Beverage (MNST), Zumiez (ZUMZ) and Parametric Tech (PMTC). Click below to watch the video.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
On Monday, Cabot China & Emerging Markets Report Editor Paul Goodwin discussed the importance of knowing your own investment style. If you don’t know yourself well, Paul writes, you could forever doom yourself to an unprofitable investment career. Featured stock: Qihoo 360 (QIHU).
On Thursday, Cabot Publisher Timothy Lutts discussed cures for Alzheimer’s disease and why a few medical ideas might not “move the needle” on the stock prices of the companies who currently have Alzheimer’s drugs in the pipeline. Featured stocks: Vivus (VVUS) and Equinix (EQIX).
Editor of Cabot Wealth Advisory
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More