"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 (though possibly emerging from) a recession. In fact, according to a recent report from the National Bureau of Economic Research, that recession started in December 2007.
Despite the recent (and somewhat questionable) rally, American stocks over that period of time -- paced by enormous declines in bellwethers such as DuPont (NYSE: DD ) and AT&T (NYSE: T ) -- are down 25% in aggregate. In fact, just two stocks in the Dow Jones – IBM (NYSE: IBM ) and Wal-Mart (NYSE: WMT ) -- have posted a positive return over that time frame.
Now, while the U.S. economy has been receding (i.e., seen negative GDP growth), it looks like China has grown its GDP 9% or so, India 7% or so, and Brazil 5% or so. 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 while some have performed slightly better, that generally has not been the case.
Here's how it breaks down
In fact, Brazil's stocks are down 5% since December 2007, India's 15%, and China's a whopping 38%. Again, that's despite the healthy growth all three of these countries saw in 2008.
There is more to an investment's performance than the GDP growth rate of its home country. One must 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 ...
If you're paying attention, 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.
That's because 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, that divergence between the performance of emerging-markets stocks and their outlook for the future prompted famed Templeton money manager Mark Mobius to tell Bloomberg that, when he and his team were looking at emerging-markets stocks not too long ago, "We're like children in a candy shop."
And that, dear Fools, was the reveal
See, emerging-markets stocks were oversold by investors who -- for whatever reason -- need safety. Perhaps they were 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. And while prices have moved up since then, there are still significant pockets of opportunity.
Further, 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 burning the midnight oil wading through the financial statements of all of the attractively priced stocks.
Today's the day
The fact is, 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 Ctrip.com (Nasdaq: CTRP ) traded at substantial EV/EBITDA premiums to slower-growing peers such as Expedia (Nasdaq: EXPE ) . Today, that premium has drastically 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 Dec. 12, 2008. It has been updated.