Don’t Be Scared of Emerging Markets

Investors should judge a country by its growth, not its politics.

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Tim McCarthy
Tim McCarthy

If you looked back at many stories on investing in emerging markets over the past decade, you may have thought this category should not be a part of your total portfolio. Many retirees continue to think emerging markets are still too dangerous for investing. Yet what they are missing is just how many of these countries have now risen out of the emerging markets category and into what I call “growth countries.”

Back in 2000, the BRIC nations, Brazil, Russia, India and China, represented only 3 percent of the world’s gross domestic product. By 2012, they had advanced to represent over a fifth of the world’s production. Thus, all those investors who thought it better to wait until those countries were “more stable” missed out on this major opportunity. In recent years, an additional 16 countries have graduated into the growth countries category.

Many of the world’s top global analysts are predicting that over time, many in this group will likely grow 50 to 100 percent faster than the developed world. In addition to the BRICs, similar higher-quality growth countries include Taiwan, South Korea, Hong Kong, Singapore, Malaysia, Thailand, Australia, New Zealand, Turkey, Israel, Czech Republic, Poland, Hungary, South Africa, Mexico and Chile.

Country flags

Why do so many Americans miss out on this opportunity? Often it is because they mix up their biases, political views and perceptions with their core investing approach. One wise tycoon summed it up best for me: “I may not personally like a particular person or even country. But when it comes to investing, I don’t let my personal views get in the way of where I put my money. If I see good metrics, a good investment opportunity, I invest. This attitude has resulted in my not missing several great investments.”

I have seen many Americans shy away from investing in countries that had great metrics for showing potential growth. They say, “Oh, South Korea. I know they are growing, but I worry about North Korea. I think I will wait until that is all settled.” I smile when I hear this comment because from 2000 to 2003, I led an investor group investing in South Korea that made over 600 percent on our money, while my friends back home were still waiting for the country to be “safe." Although we employed an active strategy that many investors cannot embark on, deciding to invest zero money in a broad-based strategy of mutual funds that focuses on growth countries unnecessarily limits your portfolio prospects.

I find it ironic that when I discuss a region for investing, people are very interested; however, if I discuss the particular countries contained in a regional portfolio, many people back off. They will say things such as, “Oh, Mexico. They have drug wars there. It’s too volatile.” Or “China is a communist country. I’m concerned about their governance.” Or “Turkey is too close to a war zone.” Yet when I look at the money investors have made in such places over the last 15 years and how strong the long-term growth rates appear, I find it sad that so many of my friends are missing out on these opportunities.  

What makes this new world order of growth countries exciting is that they are so diverse, geographically, demographically and economically. Even if one or more of these countries runs into problems, the basket of all these selected countries is so diverse that long-term, this basket is likely to grow much faster than the developed world.

The developed world has much more debt than it should, especially for its aging populations. Having a portion of the growth countries as a part of your core investments will actually decrease the overall risk in your portfolio because these countries are not always correlated over the long term with Europe, North America and Japan.  Many of them have lower debt-to-GDP ratios than the developed world and now even stronger currencies. Their regulatory and economic infrastructure has improved to a point where they are actually superior to several of the developed economies in certain areas.

Even if you are retired, your money still needs to grow throughout your senior years. Having a minority portion of your total portfolio invested in a broadly diversified package of growth countries is a wise move. Naturally, you will not want to invest too much in any one country, and it is safer to stay out of the countries that still are in a “frontier,” or far from emerging, state.

Will some growth countries be volatile? Of course. But given the recent rise in the developed countries’ stock markets, they will also continue to experience ups and downs. It is important to note that short-term market timing on a consistent basis does not work. However, over a decade or more, making sure you have some exposure to markets that are growing is a wise long-term strategy.

What does a sample allocation to the growth countries look like for someone in their 60s? Having 10 to 20 percent of your total portfolio in a combination of the growth countries’ large-cap equities and rated bonds over the next 10 to 15 years should result in a more balanced and higher-returning total portfolio. If you are younger, then, the percentage can easily be 5 to 10 percent higher. And keep in mind if you only try to invest overseas through U.S. securities, you will miss out on many of the world’s largest growing companies.

Consider that if you’d been put off by all the turmoil and volatility in the United States in 1900, for example, you would have missed the greatest investment opportunity of the 20th century. So don’t miss out on a similar opportunity in the 21st century just because these countries don’t look and act like your own country. Many of them have found their path to success, even though it may be quite different from the path we took.

Tim McCarthy is the author of “The Safe Investor,” released in February 2014, and former chairman and CEO of Nikko Asset Management Co. He has also worked at other large financial institutions such as Fidelity Investments and Merrill Lynch.