But should you love them and leave them?
- Decision time approaches on emerging market stocks
- Make sure FDIC covers your bank deposits
- Long-short funds don't live up to their promise during downturn
- Shopping for benefits can have its rewards
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that
- Taking stock
- Discounted price opens eyes to benefits of closed-end funds
- The week ahead
Many are suggesting that investors continue to partake in the momentum as emerging markets benefit from another round of easy money from the U.S. Federal Reserve's recent rate cut, plus a tendency by global fund managers to chase growth-spurt countries from Asia to Latin America.
But they are warning that easy money and momentum work two ways--inflating stock prices at first but sometimes causing manias that go too far, and end badly.
Merrill Lynch analyst Michael Hartnett summed it up in a recent report when he wrote: "Can the emerging bull market continue? Yes." But then he added investors had to remain attentive: "An asset bubble seems likely, led by BRIC markets," or Brazil, Russia, India and China.
Emerging markets--in usual form--fell harder than developed markets as investors fled stocks in July and August amid concerns about the impact of the U.S. subprime bond mess on the worldwide financial system. While the Standard & Poor's 500 dropped 9.4 percent, emerging markets lost 14.4 percent. Yet, as fear subsided, emerging market stocks sprang back powerfully, gaining 25 percent since Aug. 19.
For the year, the MSCI Emerging Market index is up nearly 37 percent, and the S&P/Citigroup Latin America index is up 49 percent. Developed markets--including the U.S., Europe and Japan--have been no match. For the year, the U.S. S&P 500 is up about 10 percent. Japan has limped along at roughly 2 percent.
The emerging markets, which provide commodities to the world and also consume them as they build highways to housing for a growing middle class, have followed the trend in commodities prices. For the year, energy stocks are up 27 percent, and materials are up 23 percent, according to S&P.
Analysts say that if areas such as China and India continue their tremendous growth, and the U.S. avoids a recession, the prices of emerging market stocks are not out of line. But they are starting to reach levels that are making some analysts cautious.
"As the current up leg in emerging market share prices continues to gain momentum, it is time to ask what will cause the next shakeout," BCA Research said in a recent report.
Typically, emerging market stocks--measured by prices compared to their earnings--have sold at a discount to stocks in developed countries, because of the added risk. But that is no longer true.
They are running neck and neck now, with emerging stocks about 13.3 times earnings compared to 13.4 times for developed countries, said T. Rowe Price emerging market portfolio specialist Todd Henry.
With stock prices on emerging stocks that high, there is extra risk to investors, he says.
"There isn't a lot of room for disappointment," he said.
Stocks could fall significantly if earnings growth doesn't materialize as expected. And growth worldwide is in a slowing trend. Earnings in emerging markets are expected to climb 14 percent this year, compared with 41 percent in 2003. For developed countries, this year's estimate is 8 percent, compared with 19 percent in 2003.
Henry notes that in 2007 emerging market stocks are in the opposite position as they were early in the 2000s. Then, the stocks had been ignored for years. During the five years up to 2001 they had climbed only about 1 percent a year. It was, in part, because they were so cheap that they soared so powerfully over the next five years.
Rather than being attracted by prices climbing 40 percent now, Henry says "that's a bit of a sign--a red flag."
Still, whether investors should flee, or stick this one out, depends on the type of investors they are. Henry notes that T. Rowe Price growth fund managers, which take on risk, are weighting emerging market stocks heavily--at close to 25 percent of international portfolios. Meanwhile, value managers who avoid stocks when they become pricey and risky have reduced emerging market exposure significantly.