Tuesday, October 9, 2007

Emerging market boom

Today I am writing about the booming emerging markets. In the past 5 years or so they have been averaging, as a whole, over 20% gains annually. If you were to invest in the Vanguard Emerging Markets Index fund one year ago you would have already earned 40%.

Taking that kind of hot performance into consideration my risky side wants to throw my money at it. Here is where my conservative economist side comes into play. I really do not know a lot about emerging markets. What are the average PE ratios of those markets? That is a very relevant question, it would tell you how much the current prices are due to betting on the future and how much of the price rise reflects actual growth of the economies.

In theory I can understand a certain degree of price inflation on the stocks of emerging markets. They are just now coming into the world economy as actual players and they represent the majority of the world's population. China and India for example are both considered emerging markets. Imagine for a second what it would be like if the majority of the billions of people in China and India became what we in the West would consider "middle class" socioeconomically. As a whole they would have an unheard of spending power and who knows how far that could go. It is an exciting idea. It would be kind of like buying into the stock market back in the early 1900's in the US except... bigger...

Here is my theory. It is based on nothing other than the idea that there must be some kind of gravity involved with the price of those stocks. If they are actually price inflated as I fear, they could suffer the same kind of market crash as we did in the late 20's. If one were to invest in the US stock market at the height of the boom in the 20's they would have had to wait over 10 years to make their money back after the crash. Is there a crash coming in the emerging markets? When will it happen? If I put my money into emerging markets today would I be in the negative for the next 10 years?

Another thought. We know there is an imminent rise of a middle class in the emerging markets. How do we know that those markets are going to be the ones that profit the most from that class. With the expansion of globalization eventually anyone will be able to do business easily and cost effectively anywhere in the world. It is already happening. That said what is stopping todays giants from growing into those emerging markets and being the ones who capitalize. Just because a company is based in the states doesn't mean that it is confined there. Case in point look at the popularity of Japanese automobiles in the US. They are probably making more money from the car market in this country than many of the car companies in this country are. What then makes investing in companies located in emerging markets so special?

I know that in the long term investing broadly across emerging markets is a very good idea. However is now the time to do it? Can it keep going up? Eventually it will and people who invest in it now who have 20 or 30 years to wait will probably be very happy about that decision.

I have things to do and I am not going to bother editing this now. More on this topic as I learn more about it. I will be sure to post something when I find out a little more about PE ratios and such. If they are low I am in!

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