Funds are pouring into emerging market funds, with one-twelfth of total holdings having come in over the past 90 days, writes Jason Zweig of The Wall Street Journal. Presumably, he says, the heavy inflow is in “hot pursuit of high recent returns” (the asset class is up 12.4% this year).
While participating in these funds is a good idea, Zweig says, investors should be careful not to rush in. “These stocks aren’t so much absolutely cheap as relatively cheap,” he argues. According to Chris Brightman, chief investment officer at Research Affiliates, emerging markets are “half the price” of U.S. stocks. While these lower valuations are attractive and provide “at least some cushion against the risk of a trade war or other changes in U.S. policy,” Zweig points out that relative cheapness is not a guarantee of safety. He writes, “they are still prone to currency crashes, commodity collapse and political turmoil.”
Chuck Knudsen, a portfolio specialist for emerging-market stocks at T. Rowe Price argues that expectations in this space have increased in recent years and has resulted in those stocks dramatically underperforming stocks in the industrialized world “for most of the time since 2009.” Now, however, earnings of emerging-market companies remain well below average (based on the last 20 years) and have room to grow. But investors should understand their exposure and any factors related to country risk.
The bottom line, writes Zweig, is that “there’s no rush to buy just because recent returns have been hot.”