Why do people invest in emerging markets?

[LordSquidworth]

Originally Posted by peterInvestor

because like small cap companies tend to grow quicker than big capped company,
emerging markets are also tend to grow quicker than developed country's market.
IMO

That's the theory.

Doesn't seem to be working.

[bigboibob]

Countries go through fluctuations in prosperity over long periods of time. The core of investing in emerging markets is the belief that emerging markets will improve. It's similar to value investing in that you're seeking undervalued countries that are trading at low multiples.

http://cdn.theatlantic.com/static/mt...x376-90953.png

Europe was a emerging market prior to 1500 while India and China were world powers. The dark and medieval ages was mostly dark and medieval for just the Europeans. Asia and the middle east were at the end of their golden eras in 1500.

Empires generally last for 200 to 500 years, however their most prosperous years are only 100 to 200 of that. The long term debt cycle prevents countries/empires from dominating for longer than 500 years. Generally they become saddled with debt and slowly fall apart. That's happened to all major powers-Rome, Greece, Persia, India, China ect..

[Taiko]

Originally Posted by Glenn Miller

Cough* China *Cough *Cough Russia Cough*

MarketS a plural. Diversification, you can easily place Radioshack in place of Russia but most will still be okay because Radioshack or Russia is just a small part or a greater whole.

[ohio_peasant]

Originally Posted by LordSquidworth

That's the theory.

Doesn't seem to be working.

There are really two separate questions in this thread.

One is a visceral repugnance at doing business with societies rife with corruption, abuse, and rampant disregard for human rights. So if dictatorship XYZ is prosperous because of oil, diamonds, sweatshop labor and so forth, one ought perhaps to avoid investment there, not for financial but for moral reasons. A related concern is that in authoritarian societies, private property is never secure, so that even if local corporations are profitable and investments prosper, that prosperity is unstable.

The second question is more coldly calculating and limited to financial (as opposed to moral) questions. Is there really a "risk premium" for emerging markets? Or are investors saddling themselves with higher volatility ultimately for naught? The skeptical reasoning is that the highest profits are earned not by local startups, but by international behemoths. So if Indonesian or Brazilian or whatever consumers start demanding more meat, more electronics, more cars, better housing and so forth, well, those burgeoning needs will be met by Con Agra and Archer Daniels and Sony and Volkswagen. This implies that emerging-market growth merely translates into developed-market corporate profits. The growth is real, but it's not reflected in local stock markets because the profits are, so to speak, off-shored.

The first question is a matter of philosophy, which can't adequately be resolved in an investment-forum. The second question however is very appropriate and a trenchant subject of debate. Recent years have seen a lag in emerging-market stock returns relative to the US, and even relative to other developed markets. And so we ask ourselves: is this a structural trend, likely to proliferate for the above-mentioned reason? Or is it a cyclical trend, subject to eventual reversion to the mean? If it's structural, then there's no point in investing in emerging markets, other than perhaps chasing exoticism and the occasional spicing of one's portfolio. If however the recent trend is cyclical, then we should overweight emerging-market stocks in search of better value (lower P/E and so forth).

[Pretzelogik]

Odds probably better than Vegas.

[ncole1]

Originally Posted by Glenn Miller

I'm not saying they have good economies. I'm using them as examples as to why developing markets aren't great to invest in. Their stock markets have been stagnant for 10 years.

This is severe recency bias. What is the compounded annual return if you look at the past 50-100 years?

I invest in things that have done well over the past 50-100 years but have not been so hot in the last few years - this way, I know I am not buying into a bubble.

Even Shiller's data supports the notion that the underpriced stocks, relative to 10-year trailing earnings, have good prospects. Of course these are largely the same stocks that have stagnated in price for 5-10 years while the underlying earnings have continued to grow.

[bigboibob]

Shiller is holding European investments.

Greece is kind of like an emerging market