Fishing for Investments in Foreign Waters

As the U.S. stock market marches to new heights, investors look around and wonder if there are other places to invest. Foreign markets are usually mentioned, and emerging markets are sometimes suggested. 

There are certainly opportunities abroad, but even the savviest entrepreneurs need to cast carefully when fishing outside their own pond.

The S&P 500 has appreciated an annualized 15.4% over the past five years, while the MSCI Emerging Markets Index has risen a respectable 4.9%. The S&P 500’s price-to-earnings (P/E) of 27.45 is near a cyclical high, while the P/E for emerging markets is currently 13.6.

Does that suggest an opportunity? Or does the lower P/E for emerging markets reflect an unfavorable economic outlook, lower expected corporate growth or just a discount associated with foreign markets versus the U.S. markets?

Let’s dig a little deeper. The International Monetary Fund’s most recent economic outlook for various economies forecasts GDP growth of 4% for developing economies versus 1.7% for advanced economies, including the U.S. and the European Union.

Additional analysis by AMG reveals that not all emerging markets are preferable ponds for investments. Since 2009, emerging-market countries with democratic governments have seen their annualized GDP growth rate outperform that of developing countries with autocratic governments by 2.58%. In fact, since 1980, democratic developing countries have seen their GDPs grow an average of 2.07% a year, while autocratically ruled nations grew at an annualized rate of 1.71%.

Additionally, emerging markets’ P/E has historically been in the 12 to 14 range, while the S&P 500 P/E is normally in the 16 to 18 range.

All of this suggests that the current P/E variance between emerging markets and the S&P 500 might hold an investment opportunity. So how do you take advantage? You could invest in the MSCI Emerging Markets Index, but it includes between 5% and 20% Chinese stocks. Or you could select a managed emerging-market fund, which moves its allocations among countries based on economic performance and specific investment opportunities.

Like any fishing expedition in unfamiliar waters, it’s wise to have an expert guide, and your AMG counselor is ready to help.