"We're like children in a candy shop."
Who said it, and what was he talking about? I'll give you a hint: It was a master investor, and he was talking about buying a small group of stocks. But before I can reveal the exact investor and the precise stocks, I need to set the stage.
How much do you know about the global economy?
You're probably aware that the United States is in a recession. In fact, according to a recent report from the National Bureau of Economic Research, we've been in a recession since December 2007. American stocks over that period of time -- paced by steep declines in financial sector stocks such as Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), and Capital One (NYSE: COF) -- are down 35% in aggregate.
Now, while the U.S. economy receded (i.e., had negative GDP growth), it looks like China grew its GDP 9% or so, India 7% or so, and Brazil 5% or so in 2008. Given those facts, and holding all other variables equal, we would expect that the stock markets in these countries would have far outperformed our own.
But even though some have started to perform slightly better, there's still a discrepancy.
Here's how it breaks down
In fact, Brazil's stocks are down 17% since December 2007, India's 23%, and China's an astounding 43%. Again, that's despite the fact that all three of these countries saw healthy growth in 2008.
The fact is that there is more to an investment's performance than the GDP growth rate of its home country. One has to take into account valuation (emerging markets stocks were overvalued last year relative to their U.S. peers), risk (emerging markets stocks will be more volatile than their U.S. peers), and future outlook (emerging markets are expected to perform worse than the U.S. going forward).
Wait a second ...
Hopefully you were paying attention and your eyes ground to a halt upon reading the last bit of that last sentence. You may have even set to writing a nasty email to me that questioned my facts, sanity, and competence.
Although emerging markets are in many cases valued as if their economies will perform worse than the U.S. going forward, economic growth in the world's emerging markets -- though it will slow in 2009 -- is expected to continue to outpace that of the United States for many, many years to come. Of course, it's that divergence between the performance of emerging markets stocks and their outlook for the future that prompted famed Templeton money manager Mark Mobius to tell Bloomberg that, when he and his team look at emerging markets stocks these days, "We're like children in a candy shop."
And that, dear Fools, was the reveal
See, emerging market stocks have been oversold by investors who -- for whatever reason -- need safety. It could be because they're professional investors seeing redemptions, individual investors who can't stomach additional losses, or any other kind of investor who doesn't want to worry these days about currency risk, political upheaval, unpredictable tax rates, or the myriad other concerns that keep global investors on their toes.
But current prices of global equities mean you're being more than compensated to take those risks with the benefit of the tremendous growth potential that emerging markets offer. Again, that's why Mark Mobius feels like a kid in a candy shop.
And Mr. Mobius isn't the only institutional investor who's salivating over the opportunities in emerging markets today. JPMorgan wrote in a recent note to clients that "China is a must buy today." Credit Suisse raised its Asia ex-Japan rating to overweight. Our Motley Fool Global Gains team is getting ready to leave on a research trip to China in July.
Today's the day
The fact is that, thanks to the recent economic downturn, savvy investors are being given the opportunity to buy up the fastest-growing companies in the fastest-growing parts of the world for cheap. Just last year, emerging names such as China Mobile (NYSE: CHL) and America Movil (NYSE: AMX) -- two firms that have been growing the top line at 20% or more annually -- traded at substantial premiums to slower-growing peers such as AT&T (NYSE: T) and Verizon (NYSE: VZ). Today, that gap has significantly narrowed.
That's silly, of course, and the market will correct that discrepancy eventually. In the meantime, take advantage of the situation to put emerging markets growth in your portfolio on the cheap.
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This article was first published on Dec. 12, 2008. It has been updated.
Tim Hanson
owns shares of America Movil, which is a Motley Fool Global Gains recommendation. The Motley Fool has a disclosure policy.
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