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Emerging Markets Are Not Europe

We continue to see the Emerging market stocks get beat up as the global economy has cooled and the U.S. and European debt problems percolate every day. We believe that current headlines and TV talking heads are preventing investors from taking the long-term view on this important asset class. So… let’s step back and gain some perspective.

During the last decade Emerging market stocks have been the best performing stock asset class, gaining 16.1% annually, while Emerging market bonds have been the best performing bond asset class, gaining 10.5%. Compare this to the annual 3.5% gain in the U.S. Russell 3000 Index, and the 5.6% annual gain in the U.S. Aggregate Bond Index.

The demographics and growth forecasts for these nations suggest the next decade is just as bright. Jim O’Neil of Goldman Sachs (who coined the term “BRIC”s) notes that the BRIC (Brazil, Russia, India, China) economies have grown to $13 trillion in size and are poised to overtake the size of the United States and Europe in the coming years. Bloomberg data shows that companies in the MSCI China Index, the largest emerging market, had higher revenue per share, higher earnings per share, a higher dividend yield, and a lower price-earnings ratio than stocks in the S&P 500 Index at 3rd quarter end:

Revenue Share %Earnings Share %P/EDividend Yield
MSCI China Index24.0%27.1%9.3x3.5%
S&P 500 Index8.7%16.8%13.7x2.1%

Emerging markets are cheap, trading at levels 35% less than their 15-year historical average, with a current price-earnings ratio of 9.7x earnings. Lower interest rates are on the horizon in these regions too, which will help spur growth. Brazil and Indonesia lowered interest rates recently, China lowered its bank reserve requirement, and bond traders expect interest rate cuts in Mexico and India in the coming months. The MSCI Emerging Market Index has outperformed the MSCI World Index by 20% in the 12-months after interest rates peak in the BRIC nations according to data compiled by Bloomberg since 2003.

Yes, the Emerging markets have fallen faster and harder, but they also tend to rise faster and higher when markets turn up. Investors who keep our long-term, value-driven philosophy in mind and practice will do well. Remember, achieving your goals through long-term performance, not short-term volatility, is our goal!

Please call us with any questions or concerns. Feel free to forward this to others who might be interested.

Have a great day!

Bob and the All Star Team

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