When the market falls the weakest stocks from emerging markets take the worst hit. And when the market recovers these same stocks are often the most impressive performers. Why buy emerging market stocks? Buy them to diversify your portfolio, to pick up cheap investments when currency exchange rates are favorable and buy them to take advantage of economies in their early stages of growth. This may in fact be a reasonable time to buy emerging market stocks. Bloomberg notes that emerging market stocks are advancing with an 11 year low in volatility.
Emerging-market stocks rose toward the highest level since China’s currency devaluation last year, while volatility fell to an 11-year low, on optimism earnings are improving and central banks remain supportive of growth.
More than half of developing-nation companies that have reported financial results for the last quarter have beaten estimates, following similar positive momentum in the U.S. and Europe.
The MSCI Emerging Markets Index climbed 0.5 percent to 874.98 at 9:22 a.m. in New York, heading for the highest since Aug. 11 and tracking gains in Europe after the U.K. reported second-quarter growth that was quicker than estimated. Eight of the 10 industry subgroups on the developing-nation gauge rose, led by technology companies.
The old wisdom is that the best time to buy stocks is when things are at their worst. The problem is knowing just when that is and not investing your money at the beginning of a prolonged period of stagnation. Thus many investors look for the first sign of an uptick in order to buy and ride a bull market to profits. If this a good time to purchase, why buy emerging market stocks?
Strong Dollar, Offshore Bargains and ADRs
The US dollar is strong and will likely get stronger as interest rates go up in the USA. The current best guess is that rates will go up in December and not before. Nevertheless, a strong dollar makes stocks in foreign countries cheaper, even if you purchase them via American Depositary Receipts (ADRs). You hope, of course, is that when the dollar weakens and the foreign currency gets stronger that your investment in that country will profit both from the business and from the exchange rate. The web site Top Foreign Stocks offers lists of foreign ADRs available from Austria through Zambia. Here is Zambia.
- Copperbelt Energy Corp: Electricity
- Zambeef Profits: Food Producers
- Zambia National Commerce Bank: Banks
- ZCI Limited: Industrial, Metals, Mining
We are not suggesting that you buy any of these specific stocks but rather suggest that you look at companies that make money within the country instead of exporters. This is because virtually all commodities are denominated in US dollars so the exchange rate changes make little difference to the value of the stock. But in a growing economy the service sector can prosper and your profits will be denominated in an eventually stronger currency.
ADRs and Analysis of Intrinsic Value
Successful long term investing requires that you look at the intrinsic value of the stocks that you buy, hold or sell. The value of ADRs is that first of all you do not need to speak a foreign language or buy stocks in a foreign market. And secondly top level ADRs provide the same sort of financial info that US stocks do which allows you to make an accurate assessment. To the extent that you spend the time researching emerging market stocks and make reasonable picks you will have a stock portfolio that is nicely diversified across currency exchange rates and various world economies.