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Why It’s Time to Invest in Emerging Markets Again

8 city at night

According to analysts at Goldman Sachs, the five biggest stocks in the S&P are responsible for most (50%+) of gains dating back to April. At the same time, the average stock is off roughly 25% from its highs.

The current pullback may not come as a surprise to investors that watched ballooning valuations with trepidation and fears of a deep correction, especially in growth stocks. However, a decline in large-cap growth may offer an opportunity in neglected sectors like small-cap growth and value.

We’re seeing it already. The Vanguard Russell 1000 Value ETF (VONV) is up 17% over 12 months while famed growth investor Cathie Wood’s Ark Innovation ETF (ARKK) is down 49%.

Looking ahead to 2022, the year may be shaped by three factors: inflation, corporate investment and the pandemic’s path. No question inflation is gaining momentum. We will need corporate capital spending to pick up, driven by strong profits and cash flow. COVID-19, politics, and, on the international front, issues from Taiwan to Ukraine are the wild cards.

What’s the best-case scenario? One where “monetary policy tightens less than investors fear,” with the Fed not taking the punch bowl from the party while strong capital expenditure and improving supply chains and global health continue to push growth, according to Morgan Stanley, which has an above-consensus outlook of 4.7% global GDP growth for next year.

To protect your portfolio you need to think contrarian and this leads us to a combination of value and income not talked about much these days – emerging markets.

A smart choice here would be the WisdomTree Emerging Markets High Dividend Fund (DEM). It’s my favorite emerging markets ETF for 2022.

Consider an Emerging Markets ETF
Emerging markets in Asia, Latin America and Europe make up more than 75% of the nations and population in the world. On top of this, these countries account for about 60% of global GDP.

These nations also hold the powerful combination of the dominant share of the world’s natural resources and the largest group of young, urban, rising middle class consumers.

The WisdomTree Emerging Markets High Dividend Fund covers 17 different emerging markets covering large caps, mid-caps and small caps in these countries. All these stocks are in the top 35% of emerging market companies by dividend yield, leading to this exchange-traded fund delivering a healthy 4.5% dividend yield.

So while you keep holding and buying American growth stocks, you should add some international value and income to your portfolio to balance things out.

Before long, emerging markets will again be back in favor as growth stocks, and the stocks in this fund in particular, come back to where they were during their boom times.

In investing, extreme prices move up or down and then eventually return to their average like a rubber band. Stretch it, and when you let go it always returns to its original shape. That’s what Wall Street gurus mean when they refer to “reversion to the mean (average).”

Emerging market stocks have stayed down for too long. Look for them to start reverting to the mean in 2022.

Do you own any emerging market stocks in your portfolio? Tell us about them in the comments below.