Investors are asking one question these days: should you be buying emerging market stocks or will they decline further?
In the long run, I am bullish on the emerging markets. The reason for this is very simple: the emerging market economies have a significant amount of room to grow. For example, in some emerging countries, a massive portion of the population still lives without electricity; there are not enough homes; roads aren’t there to sustain the population; industries aren’t developed; and the list goes on…
Understanding what’s happening in emerging market stocks now is very important for those who are looking to invest. When the Federal Reserve started to implement its easy monetary policies, investors rushed to the emerging markets; they could get better returns there. Now that the Federal Reserve is threatening the prospects of easy money, investors are worried and selling.
Since we started to hear speculations that the Federal Reserve would taper its quantitative easing, investors have been rushing out of the emerging markets. No matter where you look in the emerging markets, you will see key stock indices facing a sell-off.
Look at the chart of Turkey’s stock market below. It’s down more than 30% since June of 2013.
Chart courtesy of www.StockCharts.com
Turkey’s stock market is just one example; other emerging markets stocks are sliding lower as well. For example, China’s stock market is down more than 12% since June of last year. The Brazilian stock market is down about 20% for the same period.
According to my analysis, it shouldn’t be a surprise to see the stocks in emerging markets slide even lower. You have to consider that the Federal Reserve is full-out preparing to pull back on quantitative easing. It will cause investors to panic—and sell more.
This means that for those who are already involved in the emerging markets (and those who entered the emerging market in 2009), it’s time for them to take some profits off the table if they have any.
Those investors looking to profit over the long term should be using the sell-off to their advantage. They should be tracking companies that have a major market share in their respective economy. This strategy is similar to one that I have talked about before in these pages. (See “How to Profit from China’s Economic Slowdown.”)
But some words of caution: Investors should look for emerging market companies trading on the key stock indices here in the U.S. By doing this, investors essentially protect themselves from certain risks in case things don’t go as planned. Investors also have to know that emerging markets tend to have a significant amount of volatility; they shouldn’t be risking what they can’t afford to lose.
Finally, investing in emerging markets through exchange-traded funds (ETFs) can be good for investors who don’t have much time to research, but in the long run, stock picking can pay significantly better.
This article Three Tips for Investing in the Emerging Markets was originally published at Daily Gains Letter