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On Wednesday, the Indonesian rupiah became the latest victim of what looks like a currency crisis spreading through the developing world. The debt-ridden Asian nation’s currency hit its lowest point against the dollar in two decades, while formerly high-flying India’s rupee also was under siege.
That followed news that beleaguered Turkey saw inflation rise to 18%; that South Africa’s economy had slipped into a recession, and that Argentina’s central bank had raised its benchmark rate to 60%—that’s no typo—in an effort to stem capital flight from a country that just last June issued 100-year bonds that were gobbled up by some of the world’s supposedly most sophisticated investors.
Yes, these countries’ economic problems are probably unrelated (though they’re all victims of a stronger U.S. dollar). But after weeks of turmoil that accelerated when President Trump imposed punitive tariffs against Turkey for keeping an American Evangelical preacher under house arrest, this is starting to resemble the Asian financial crisis of 1997-98 as fear of contagion spreads.
On Tuesday, the MSCI Emerging Markets Currency Index recorded its sixth decline in seven trading days, while on Wednesday the same firm’s EM stock index posted its sixth straight loss.
“There seems to be no sign of halting the downtrend,” Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo, told Bloomberg.
And yet in the midst of all this, some self-styled contrarians, who took the lessons they learned about diversification in finance classes far too literally and are way too fond of parroting Warren Buffett’s famous saying of “be…greedy when others are fearful” are telling their clients to come on in, the water’s fine.
In recent weeks, strategists from investment firms GAM, Goldman Sachs, BlackRock and Franklin Templeton have said now’s the time to jump into these besieged markets. Their rationale: cheaper valuations than U.S. shares and the faster GDP growth of emerging-market economies.
This is starting to resemble the Asian financial crisis of 1997-98 as fear of contagion spreads.
For years, this column has been negative on emerging markets. We most recently warned readers around Memorial Day to stay away. Those who took that advice had a peaceful summer.
But for those of you who didn’t listen, here, once again, are four big reasons not to buy emerging markets, especially in the midst of currency contagion.
1. Despite what herd-following financial advisers tell you, faster economic growth does not translate into higher stock-market returns. Leading academic researchers have demonstrated this conclusively and yet this notion, one of the biggest fallacies in investing, refuses to die.
2. Big index providers FTSE and MSCI have added Chinese A shares (stocks traded on the Shanghai and Shenzhen exchanges) to their emerging-market indexes in recent years. That means giant EM index funds and ETFs, including the largest, the Vanguard FTSE Emerging Markets ETF VWO, -0.05% have 36%-40% of their holdings in China. That’s an awful lot for a country locked in a tit-for-tat trade war with its biggest market, the United States. It also puts investors at greater risk for any whimsical decisions made by President for Life Xi Jinping and his Communist Party-ruled state.
3. I hate to break it to the true believers, but emerging markets are still in a long-term “secular” bear market. This chart shows the iShares MSCI Emerging Markets ETF EEM, +0.10% has never matched its record closing high of $55.73 on Oct. 31, 2007, even after a huge 36.4% surge in 2017. Tuesday’s close of $41.77 was 25% below EEM’s all-time peak.
4. And finally, over long periods emerging markets are far more volatile than U.S. stocks. Over the 20 years ended March 31, the standard deviation for the MSCI EM index was 23.2%, vs. 14.86% for the S&P 500 SPX, -0.37% according to ICON Advisers. That’s more than 50% higher. During those 20 years, ICON reports, emerging markets lost at least 30% six times; the U.S. saw only two such declines. Perhaps that’s why over even longer periods of time—1900 through 2017—an emerging-markets stock index underperformed a developed-markets index by one full percentage point a year.
I’ve long believed investors get all the EM exposure they’d ever need in an ETF like Vanguard FTSE All-World ex-U.S. ETF VEU, -0.20% which has 20% of its holdings in EM. For growth hounds, I’d stick to U.S. technology or small-cap growth stocks, which have all the growth you want without the geopolitical or currency headaches.
The world is complicated enough. Why look for more trouble by chasing the false promise of emerging markets down yet another rabbit hole?
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.
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