Believe me, I know that not only has the U.S. stock market been wobbly lately (as I write this, the S&P 500 is down about 15% year to date), but so have many international markets. Look at one of my own holdings, for example. The Fidelity Emerging Markets (FEMKX) fund is down some 20% year to date. Ouch!
These aren't small companies that are getting whacked either. According to Morningstar, the average market cap of the 280 stock holdings is about $17 billion. Top holdings recently included Vimpel-Communications
What I realized lately, though, is that some foreign markets are down even more than that -- and I'm not talking about obscure places like Elbonia or Freedonia. According to the folks at Bespoke Investment group, when looking at recent declines from peak levels, the U.S. (down 21%) has actually fared better than the much-ballyhooed emerging markets of Brazil (down 22%), Russia (down 26%), India (down 31%), and China (down 52%).
Lessons to learn
Looking over Bespoke's chart and thinking about these statistics, several lessons come to mind:
- For starters, they're useful as a reminder that foreign markets can decline just as ours can. We individual investors tend to get caught up in bullish periods, forgetting that economies don't advance in a straight line. These statistics show us that despite widespread excitement about emerging markets, they can deliver some capital-shrinking results. (The excitement comes when funds such as Fidelity's turn in an 82% gain in 1983 and a 70% gain in 1999. That alone will draw gobs of new investors, many rather naive -- like I was.)
- This also reminds us to be wary of top sectors when it comes to mutual funds. A glance at Morningstar's list of top-performing funds over the past five years turns up lots of funds focused on Latin America, energy, global resources, and emerging markets. Just remember -- these are today's (and yesterday's) top sectors -- but they may not be tomorrow's, and tomorrow's are what count when it comes to the returns you earn.
- Finally, we should remember that emerging markets can be extra volatile, rising -- and falling -- at a faster rate than more established markets.
But then...
Of course, it's not so simple. Because the truth is, these emerging markets are going to continue to emerge, despite some down years. When you see any investment that has intrigued you in the past suddenly fall, you should do some homework. It may be facing insurmountable problems -- or it might actually be a great buying opportunity.
Just be careful. When it comes to foreign companies and economies, you have to have a good handle not only on the company, but also on the country. Some countries, especially emerging ones, are fueling their growth partly by issuing more money. And that leads to... inflation. A Morgan Stanley report recently noted that at least 50 nations are currently dealing with double-digit inflation, among them India and Russia. China's rate isn't that high, but according to Investor's Business Daily, it "hit a 12-year high of 8.7% early this year but cooled to 7.7% in May."
Foreign companies also operate under varying accounting and disclosure rules, and within very different political and societal environments.
What to do
For many of us, the smart thing to do is avoid investing internationally, because we don't have the skills, time, or energy to successfully uncover great investments in that complex arena. We do have some options, though.
We can invest in many good old American companies that derive much of their revenue abroad. PepsiCo
We can also choose mutual funds with an international focus, such as the T. Rowe Price International Discovery
And lastly, we might seek guidance in finding some promising individual international companies. For example, I invite you to test-drive our Motley Fool Global Gains newsletter.
