"We're like children in a candy shop."
Who said that, 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 investor's identity and the precise stocks, I need to set the stage.
How much do you know about the global economy?
According to a report from the National Bureau of Economic Research, the United States has been in a recession since December 2007. American stocks over that period of time -- paced by declines in bellwethers such as Citigroup
Now, while the U.S. economy has receded (i.e., seen negative GDP growth), it looks as though China grew its GDP by 9% or so, India by around 7%, and Brazil by roughly 5% 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 although some have performed slightly better, that generally has not been the case.
Here's how it breaks down
In fact, Brazil's stocks are up just 5% since December 2007 while India's are down 13% and China's down 30%. 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-market stocks were overvalued last year relative to their U.S. peers), risk (emerging-market 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-market stocks and their outlook for the future prompted famed Templeton money manager Mark Mobius to tell Bloomberg that, when he and his team look at emerging-market stocks these days, "We're like children in a candy shop."
And that, dear Fools, was the reveal
See, despite their recent resurgence, many emerging-market stocks have been oversold by investors who -- for whatever reason -- need safety. Perhaps 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 why he said again today that "stocks in Brazil, Russia, India, and China are likely to rise by 30% to 40% within three to four years."
And Mr. Mobius isn't the only one salivating over the opportunities in emerging markets today. Following the recent electoral victory of the Congress Party, Morgan Stanley upgraded their outlook for India, and Wal-Mart
Today's the day
Thanks to the recent economic downturn, savvy investors now have 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 Wumart traded at substantial premiums to slower-growing industry peers such as Target
That's silly, of course, and the market will correct that discrepancy eventually. Thus, our Motley Fool Global Gains team is burning the midnight oil wading through the financial statements of all of the attractively priced stocks. We're also taking off for India at the end of the month to sit down with some of the companies there that we're thinking about investing in.
If you'd like to get the notes from those meetings, provide your email address here, and we'll mail them back to you in real-time. And since it's totally free, you can also send the link to a friend.
This article was first published on Dec. 12, 2008. It has been updated.
Tim Hanson does not own shares of any company mentioned. Wal-Mart is a Motley Fool Inside Value recommendation. Bed Bath & Beyond is a Stock Advisor selection. The Motley Fool has a disclosure policy.
