Many emerging market stocks fly under the radar for U.S. investors. That doesn’t mean they aren’t worth investing in.
On the surface, a Hollywood blockbuster and emerging market stocks don’t have anything in common. But look closely at any romantic comedy made in the last 30 years, and you’ll notice something. The protagonist almost always overlooks the love interest in the first 85% of the film. He goes after the popular girl, trying unsuccessfully to win her heart. Then some conflict opens his eyes to the fact that the love of his life has been there all along. She’s been his confidant, his friend, and his source of advice.
Life isn’t a RomCom, nor are emerging market stocks the love of your life. (Probably not, anyway. We aren’t here to judge.) They do, however, bear some similarities. For instance, it’s understandable that we all want a Google (GOOGL) or Apple (APPL) stock in our portfolio. But it’s the rare investor who looks for investments from countries in the developing world. Of course, that’s natural. After all, buying stocks is scary enough without investing in a company you’ve never heard of in another country.
What are emerging market stocks
Emerging markets stocks are among the fastest-growing investments in the global marketplace.
America represents only 5% of the world’s population and 22% of world GDP. If you only invest in American companies, you’re neglecting 95% of the world and 78% of the global economy.
Emerging markets, which represents 85% of the world’s population, are economies whose gross domestic product (GDP) is growing at a much faster rate than more developed markets such as the U.S., Germany and Japan. Consequently, emerging markets stocks often grow at a faster clip than the average stock in a more mature market.
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Brazil, Russia, India and China—the so-called “BRIC” nations—garner the most attention. But good emerging markets stocks can be found in other, less populous corners of the globe, including South Korea, Mexico, Turkey, Saudi Arabia and South Africa. The options are numerous for investors willing to explore outside their American bubble.
The challenge is that many of these emerging market stocks don’t trade on U.S. exchanges. One simple way to find emerging market stocks, is to find the strongest stocks you can that trade on U.S. exchanges as American Depositary Receipts (ADRs), thus ensuring that they’ve been vetted by the exchanges and have a clean bill of health.
Be aware, though, that these stocks can offer you the great balance sheets, talented management plus much higher growth and significant upside potential, but there is a bit more risk than investing in well-known U.S. blue chip stocks. That said, there are some signifiant advantages in some emerging market stocks.
- Lower costs and economies of scale lead to bigger profits.
- Companies in the early stages of the growth cycle, focused on fast-growing consumer markets, have the potential for sustainable high growth.
- These stocks are hidden from the radar screen of Wall Street, offering the opportunity for a value entry point.
- Emerging market blue chips have great balance sheets, 3%-4% dividends, and the same talented management as traditional blue chips.
- Some of these are substantial companies – the average market value of the top 30 emerging market blue chips is $27 billion.
Emerging market stocks can be a boon to your portfolio as long as you invest wisely and carefully. That’s not hard if you have a trusted guide. If you want to explore more of the global market, Cabot Global Stocks Explorer is your guide to finding the companies best positioned to capitalize on growing markets.
What would you want to know before putting your money into emerging market stocks? Let us know in the comments below.
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