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SAN FRANCISCO--(BUSINESS WIRE)--Although emerging markets (EM) stocks have disappointed investors in recent years, several factors indicate a potential turning point for the performance of EM stocks, says a new whitepaper by Charles Schwab.
The whitepaper, titled “Finding Value in Emerging Markets Stocks,” is published as a Q&A with Jeffrey Kleintop, Schwab’s Chief Global Investment Strategist, and examines the recent performance of EM stocks, leading up to the current favorable view, and highlights why investors should consider them.
According to Kleintop, emerging markets are “one of the few asset classes where valuations are low right now in what has become an increasingly expensive world for investors. Low valuations account for global economic sluggishness. But if global economic growth improves or stabilizes in the euro zone and Japan, the more economically sensitive EM stocks are better positioned to gain from global growth than the developed foreign markets.”
Key points in the whitepaper include:
- EM stocks are trading at a significant discount to U.S. and other global developed stock markets, might benefit from global economic improvement, be a buffer against weaker global growth and offer diversification.
- EM stocks often are considered at risk when the dollar rises and commodity prices fall. However, Kleintop thinks a strong dollar, weak commodity prices, and solid EM stock performance can coexist quite easily in the current environment.
- The recognition by the market of the attractive valuation, the potential buffer against sluggish global growth and the potential upside resulting from any improvement in the global growth picture is likely to unfold over many months to up to a year or more.
“I find it surprising that they are often overlooked by investors,” noted Kleintop of emerging markets. “Forget for a minute that they hold 80 percent of the world’s population, generate 50 percent of the world’s GDP and represent 13 percent of global stock market capitalization.
Granted, emerging markets countries are not immune to economic volatility, temporary market swings, geopolitical events or internal corruption. But historically they have offered rapid economic and employment growth, lower amounts of debt relative to the size of their economies than that of developed market nations, and they have a rapidly growing middle class.”
Though the past is never a guarantee of future results, Kleintop notes that emerging markets have historically been able to produce much faster growth than the developed markets when global exports improve, which is particularly attractive in a world where growth is scarce.
While some characteristics vary by country, Kleintop says investors with higher risk tolerances should consider emerging markets at the asset class level, as correlations remain relatively high across the major EM stock markets, currencies, bond yields, and economic growth rates.
In the end, he says, emerging markets have vulnerabilities but valuations more than account for these risks.
The full whitepaper, part of Schwab’s Investing Ideas series, is available here.
Schwab Investing Ideas offer thoughtful analyses of key market trends and investing opportunities for investors. More information, including other recently published insights, can be found on Schwab’s Investing Ideas page.
About Charles Schwab
At Charles Schwab, we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.
Through its operating subsidiaries, The Charles Schwab Corporation (NYSE: SCHW) provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; compliance and trade monitoring solutions; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.
International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Diversification strategies do not ensure a profit and do not prevent against losses in declining markets.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
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