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Emerging Market Stocks:
Taking the Long-Term View

By on October 27, 2014

Emerging markets have experienced sharp declines during the first half of 2013 due to both internal and external factors. While some investors may consider pulling back from their emerging markets positions, overreaction to near-term volatility may prove shortsighted.

Not long ago, emerging markets were viewed with skepticism due to their high-risk profile and lack of transparency. Today, many of those same markets are often considered to have the greatest growth potential and are routinely included as part of an overall investment strategy. Yet after several years of positive growth and outperformance compared to US markets, 2013 has proven difficult for most of the emerging markets due to a myriad of factors both domestic and global, which have caused returns to erode and volatility to increase.

Slower than expected global economic growth has resulted in lower demand for products manufactured by many emerging market nations. In China, a new round of monetary policies and restrictions on property purchases designed to cool an overheated real estate market has contributed to an already slowing economy. In India, high inflation has taken a toll on real economic growth. Meanwhile, commodity-producing markets such as Russia and Brazil have taken big hits as reduced GDP forecasts and growth projections coupled with a stronger US dollar, have dampened commodities prices and simultaneously increased the cost of production. While this confluence of events may seem overwhelmingly negative, it is important to remember that the emerging markets story has always included higher levels of risk with potentially higher levels of reward within a long-term time horizon.

 

Riding Out Short-Term Volatility

While the short-term outlook for many emerging markets may be restrained, their long-term growth potential is possibly a far more compelling story than that of the developed markets. Overall, the emerging markets asset class is poised to provide strong investment opportunities over the long-term, with projected growth rates outpacing developed markets according to analysis by the International Monetary Fund (IMF). Current IMF models forecast emerging markets growth in 2013 at four times greater than the developed markets. In 2014, the IMF projects growth in developed markets at 2.1%, compared to 5.4% for emerging markets.1

As emerging market economies continue to mature, they become less dependent on developed markets to fuel their growth, and instead tend to be supported in large part by increasing domestic demand and spending driven by an expanding and more affluent middle class. Additionally, emerging markets generally possess low levels of foreign debt and large amounts of foreign exchange reserves—factors that set them apart from developed markets and point to sustainable accelerated growth over the long-term.

For investors who are focused on long-term growth, the emerging markets story is as compelling as it is varied. Emerging markets countries, for example, contain a disproportionately large share of the world’s natural resources. Brazil is the world’s largest iron ore producer2, contains a vast farmable land mass and supplies most of its own oil and the majority of its own food.3 While China lacks natural resources, it is a huge importer, manufacturer and technological innovator. Russian markets can be difficult to navigate and still lack transparency, yet it is a major producer of natural gas and has vast oil reserves. In addition to emerging markets, many investors are now taking stock of frontier markets such as Kuwait, Morocco, Nigeria and Kenya, which are smaller and less developed but may offer even more growth potential though with commensurate risk.

 

Staying Focused on the Future

Maintaining an investment strategy during times of intense volatility and uncertainty can be difficult. Looking beyond short-term headlines and taking the full measure of potential future outcomes requires discipline and a truly long-term perspective, especially when investing in emerging markets. An experienced financial advisor can help you focus on long-term goals and ensure that your portfolio is well diversified in terms of potential risk reduction and reward. Please contact me if you would like to discuss current emerging market performance and its impact on your portfolio.

Courtesy of: Irene F. Stolarz
Branch Name: Morgan Stanley, Little Falls, NJ
Phone Number: 973-890-3020
Web Address: : www.morganstanleyfa.com/stolarz 

Footnotes/Disclaimers
1International Monetary Fund, World Economic Outlook Update July 2013; http://www.imf.org/external/pubs/ft/weo/2013/update/02/.
2 Bloomberg News October 2013; http://www.bloomberg.com/news/2013-10-07/vale-sees-iron-ore-market-oversupplied-from-2015-on-new-capacity.html
3 The Economist August 2010; http://www.economist.com/node/16886442
International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets.
Investing in commodities entails significant risks. . Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
If you’d like to learn more, please contact Irene F. Stolarz.
Article by Wealth Management Systems, Inc. and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
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