David and Sharon, from Vashon Island, Wash., called, concerned about seeing a drop in their January investment statement. Some investments were slightly down, and they were worried after being spoiled by months of gains.
But the recent January setback was about as expected as could be. We were simply giving a little back of a very substantial gain. Market analysts were blaming U.S. market declines on the lack of stability of emerging economies. Ordinarily, our clients are not heavily invested in emerging markets, but we are actually believers in the importance of having emerging markets in some portfolios.
The typical emerging markets are China, Brazil, India, South Africa, Australia and South Korea. Each of these is expected to have a GDP growth of 5 percent to 8 percent per year over the next three years. The fact that many naive U.S. analysts have come down hard on China dropping from 9 percent per year to “only” 6 percent per year is like the pot calling the kettle black. The U.S. would be excited to get to 3 percent GDP growth. Add to that, the price/earnings ratio (a theoretical measure of how expensive an asset is) of U.S. markets is at 17 times earnings, while the emerging markets are around 8 to 10 times earnings and could offer greater opportunity (Brandes, 11.14.13).
The emerging markets can also be “negatively correlated” to U.S. markets, meaning that sometimes (not necessarily always) when U.S. investments go down, that global investments may go up. This is not only due to their independence in fiscal performance, but also because they are based on an independent (of the dollar) currency. Some of the recent downturn is resultant of dropping global government bond values and currency plays gone bad. Consequently, portfolio managers were selling out these positions around the end of the year to “clean up” their portfolios. Long story short, emerging markets are here to stay. Those who pick up emerging markets’ large-cap stocks in the sectors of health care, energy and technology at current prices could be proud of themselves in the future!
Why have global investments, such as emerging markets, in your investment portfolio? Consider an analogy of sailing in San Francisco Bay. The winds have unexpectedly picked up (i.e., stock volatility). You do not have time to quickly drop the main sail (i.e., your strategy). You throw the anchor overboard, knowing it will not reach the bottom of the bay, but what it may do is help stabilize your boat (i.e., your portfolio), giving you time to adjust your mainsail (i.e. your strategy). Two lessons to be learned here: 1) Be cautious of any press which suggests “sell all now.” Tactical changes, “baby steps,” are just fine, and 2) Practice diversification, often considered one of the best strategies to keep our emotions in “check.” Be a good investing “sailor” and keep your eyes on the horizon, not the next wave!
The opinions voiced in this column are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon and tolerance for risk.
Certain statements contained within are forward-looking statements, including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
Although the opinions expressed are based upon assumptions believed to be reliable, there is no guarantee they will come to pass.
This information may change at any time due to market or other conditions. Emerging market investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks and differences in accounting methods.
Past performance cannot guarantee future results.
Allen Ostrofe, MBA, CFP®, AIF® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.