According to recent fund flows, a wave of new investor money has been flooding the emerging-markets category. But at the same time, some experts are cautioning that emerging-markets stocks and bonds may be getting too hot to handle.
Our colleagues at Morningstar.com, the US cousin of Morningstar.co.uk, recently posed a question on their discussion board to see whether readers are engaged in an offensive or defensive stance when it comes to the emerging-markets space. Below is a summary of investors' responses, put together by Esther Pak, assistant editor of Morningstar.com.
Get 'Em While They're Hot
A few of you convey a general sense of optimism about the emerging-markets category and expressed few qualms about the signs of possible overheating.
Riprock, for one, is certain that emerging markets still offer an amply profitable ride: "I diversify as much as possible in emerging markets between value, blend, and growth, large and small caps, as well as stocks, bonds, and convertibles. I try to find hot countries and hot sectors (like technology, energy, consumer products). I'll get 'em while they're hot!"
And poster dbcooper "plan[s] on holding T. Rowe Price New Asia for a long time--letting China find its way in the world." And while he acknowledges that "there will be ups and downs along the way, [he will] just keep watching."
User Christopher also notes that his portfolio is "extremely aggressive" and composed almost entirely of "emerging- and frontier-markets stocks and funds."
VGMontana chimed in, saying, "[Emerging-markets] bonds denominated in local currency seem like good plays now. The bonds will pay out now through their maturity, and the local currency may hedge against the dollar some."
Emerging Markets Are Overvalued
On the opposite end of the spectrum are users who consider emerging markets as a whole to be overheated.
TOOOINTENSE remarks, "Valuations of emerging markets seem to be higher than the fundamentals support. I am particularly concerned with the Chinese market. They remind me of a new teenage driver--extremely quick reflexes, not enough experience, and the feeling of invincibility. I expect some fallout from the Fed decision to quantitatively ease our economy."
And user yogibearbull echoes, "Some emerging markets seem to be reacting badly to quantitative easing, like Brazil, India, and China."
Racqueteer expresses similar sentiments about the recent emerging-markets run-up: "While I think there are good prospects in emerging markets going forward, I also think that the horses have already mostly exited the barn. Perhaps if we lay low for a while, they'll find their way back."
Taking a Measured Approach
An even larger segment of users is making room for emerging markets in their portfolios, but taking a cautious approach.
User mws17 employs diversification to limit the risks of investing in this more volatile category of investments: "I have a core emerging-markets mutual fund. I've tried to complement it with a couple of frontier-market exchange-traded funds representing countries/regions that are not currently included in that mutual fund's portfolio." (For more on these types of ETFs, read Looking Beyond the BRICs.)
And for poster dawgie, past experience caused this user to venture into the emerging-markets space with an extra dose of caution: "I have approached emerging markets very conservatively due to a bad experience with my first emerging-markets fund during the mid-1990s. It bled money year after year until I finally sold it, which may have been a mistake in the long run. About five years ago, I shifted some of my money from Americcan Fund's EuroPacific into New World, which is one of the most conservative emerging-markets funds. I've been satisfied with the results, and it has outperformed EuroPacific. It also tends to hold up better than other emerging-markets funds in market downturns because of its holdings in bonds and larger companies. Overall, New World accounts for about 5% of my portfolio. The rest of my emerging-markets exposure comes from the holdings in my broadly diversified foreign funds."
User beermoney, who was late in hopping on the emerging-markets equity bandwagon, has chosen to invest in emerging-markets bonds rather than stocks: "Because of limited options in a previous [pension plan], I missed most of the party on emerging-markets equities. Now that I'm in a [new pension plan], I'm not inclined to chase results. I sense that foreign large value and domestic large growth/value might let me sleep better during the next six months or so. I have a small stake in emerging-markets bonds, which seems like a reasonable risk/reward play and (hopefully) somewhat of an inflationary diversifier."
Please add you own thoughts or emerging markets investing stories in the comments box below.
