Experts predict that emerging-market economies will increase 6% in 2006, as opposed to a GDP growth of 3% in developed markets. Such a lofty prediction could entice more investors to plow their money into emerging-market stock funds, particularly in light of their stellar returns of 56% in 2003, 24% in 2004 and 16% year-to-date, The Wall Street Journal reports.
Certainly, developed countries like the U.S., Europe and Japan will face problems with an aging population, while the developing world does not have such a dilemma as of yet. Emerging market stocks are also really cheap, as they trade at a 25% to 30% discount to U.S. stocks, according Morgan Stanley Capital International.
But despite the attraction of emerging-market stock funds, some investment managers see reasons to avoid them. For one, there are legal and political risks, such as poor corporate disclosure and insecure property rights. In addition, the fastest-growing companies in emerging markets may not be publicly traded, and those that issue stock may lessen the value of existing securities by issuing more shares.
"We aren't presenting a case for avoiding these markets," said Elroy Dimson, a finance professor at London Business School. "We aren't forecasting that they will have inferior returns. But those who think high growth economies will produce superior returns have history against them."
According to Dimson and his peers, those investors chasing short-term returns in the emerging markets would be disappointed. If you had regularly allocated 20% of your portfolio to countries with the highest five-year economic growth rates, you would have earned the lowest in stock-market returns.
"Growth stocks may grow faster," said Jeremy Siegel, author of The Future for Investors and a finance professor at the University of Pennsylvania's Wharton School. "But are you paying too much for growth? That's critical for counties as well as individual stocks." To be on the safe side, financial planners say, investors should allocate only 5% of their portfolio to emerging markets.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.