Most investors today worry about inflation and the response to it from the Federal Reserve, but it’s time for a longer view. If you’re buying stocks for gains over the next 10 years or more, you need to imagine the contours of the future.
A July report from the United Nations gives a hint. Researchers estimate that practically all population gains through 2050 will occur in developing countries—especially India, which will become number one next year, surpassing China.
The economies of developing countries are also growing much faster than those of the United States and Europe. According to The Economist, India’s gross domestic product will grow 6.9 percent this year; the Philippines, 6.7 percent; Argentina, 4.3 percent; Egypt, 5.7 percent. By contrast, the estimated growth rate for the United States is 1.7 percent; Europe, 2.8 percent.
China is by far the largest emerging market, representing about one-third of the Emerging Market Index. But its economy is suffering self-harm: a severe response to the COVID-19 pandemic and a crackdown on technology companies, which are seen as a threat to the notion of “common prosperity.” Also, the United States is intent on eliminating China from supply chains. I recommend that investors go light on Chinese shares or buy funds such as iShares MSCI Emerging Markets ex China, an ETF that owns no Chinese stocks at all.
Another attractive fund is Invesco S&P Emerging Markets Low Volatility, an ETF that is linked to an index consisting of the 200 least volatile mid- and large-company stocks in S&P’s emerging-markets index.
Or you can stay away from index funds entirely and buy individual stocks or actively managed portfolios such as Wasatch Emerging Markets, which has only 7 percent of its assets in China and fully 29 percent in India. The fund has handily outperformed the EMI. A drawback of managed emerging-markets funds is high expense ratios—in this case 1.37 percent.
Another favorite is Matthews Emerging Markets Equity, managed by a firm that has deep Asia expertise. The fund has 12 percent of total assets in Chinese stocks and charges 1.13 percent in expenses.
India is the biggest and the best of the emerging markets, and banks with broad retail and commercial diversification provide an easy way to invest in the entire domestic economy. Among them: HDFC and ICICI. HDFC’s shares are up by about a third over the past five years; ICICI’s have more than doubled.
Brazil is the largest South American market, and although it suffers from political volatility, it has strong companies worth considering. I prefer firms that target the domestic market, including banks Bradesco and Itau Unibanco; BrasilAgro, whose businesses are rural real estate and farming; and Companhia Brasileira de Distribuição, a retailer that sells food, clothing, electronics and gasoline.
Still, emerging markets are volatile, and the risks, as we have seen with China, are often political as well as economic.
The current slump may last for years, so you need a long perspective. But putting up to 10 percent of your assets in a mix of developing-country stocks and funds today could give your portfolio a boost in the decade ahead.
(James K. Glassman is a contributing columnist at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
