Value Investing in Emerging Markets

Value Investing in Emerging Markets

     Value Investing in Emerging Markets

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MSCI maintains a Market Classification Framework that “examines each country’s economic development, size, liquidity and market accessibility in order to be classified in a given investment universe.”   The three categories that each nation’s financial status are rated under are developed market, emerging market, and frontier market.  The following chart is MSCI ratings for various nations around the world. .


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Developed MarketsAustriaAustralia







Hong Kong






New Zealand







United Kingdom

United States


Emerging MarketsBrazilChile



Czech Republic













South Africa





Frontier MarketsArgentinaBahrain


Bosnia Herzegovina





















Sri Lanka

Trinidad and Tobago



United Arab Emirates






Note: Bosnia Herzegovina, Botswana, Ghana, Jamaica and Zimbabwe are currently stand alone countries under consideration for inclusion as Frontier Markets.


Developed Markets Still Represent the Safest Place to Invest Your Money


In spite of the U.S. financial market meltdown of 2008, the United States has remained one of the strongest economies in the world.  Although there are serious difficulties in the housing market, there are people still buying homes, purchasing new automobiles and investing their retirement funds in financial instruments traded on the New York Stock Market.


There are a number of voices carrying the message that investing in developed markets is still a good investment. A report published by Atyant Capital March 17, 2011 supports the idea that developed markets such as the United States are still strong and provide an excellent place to find investment value.


In the aftermath of the financial crisis of 2008, it has become fashionable to blame Wall Street and the financial markets for all the ills plaguing the US economy. The US has one of the most developed financial markets in the world and it forms the backbone of the wealthiest country in the world.


According to a report published by Reuters May, 23, 2011, many Gulf region investors are seeing significant value in Western European and U.S. markets.

Growths in emerging markets have been strong in the last year but investors are increasingly looking toward markets where investment have been under pressure.

“A lot of investors are looking back to the developed market where they are seeing good value. If you look at the prices in Western Europe, for instance, they’re cheap,” Nick Tolchard, head of Invesco Middle East told reporters at a conference to launch the study on Monday.

Further evidence of the trend towards developed markets was provided by Jonathan Yates in an article for Emerging Money dated November 28, 2011.

China Investment Corporation, the country’s main sovereign wealth fund, will begin to invest in the infrastructure of developed nations, Chairman Lou Jiwei says. This naturally raises the question of whether China will follow with massive purchases of euro zone bonds.

After all, investing in the infrastructure of a country is no different than investing in the debt of the country. If an investor did not expect the economy of a country to grow, why invest in the infrastructure?

Such a move would also make economic sense for China’s exports. China does not need Western debt. But it does need Western economic development. About 40% of China’s gross domestic product is still generated by exports to Europe and the United States.

How About the Value in Emerging Markets?

Many financial advisors suggest caution when considering investments in emerging markets. In fact, David Peartree of Worth Considering, Inc. voiced a strong word of caution in a report for The Daily Record dated February 15, 2012

Why not, therefore, allocate portfolios more heavily toward the emerging markets, if their economies are expected to grow more rapidly than the economies of developed markets in the U.S., Europe and elsewhere?

The answer is that the correlation between long-term economic growth and long-term equity returns is extremely weak if not nonexistent. Economic growth, by itself, is not a reliable predictor of equity returns. This conclusion holds true across both developed and emerging markets.

Some of the caution expressed by investment authorities concerning emerging markets may be based on the challenge of differentiating between developed, emerging and frontier markets. A report published for Bloomberg by Tal Barak Harif on February 8, 2012 provides good insight into this issue.

The task of classifying countries as developed, emerging or frontier has gotten increasingly difficult in recent years, investors and fund managers say. A lot is at stake: More than $370 billion of assets were benchmarked to the MSCI Emerging Markets Index (MXEF) as of Feb. 7, according to Bloomberg data. Some $430 billion followed JPMorgan emerging-markets bond indexes as of Nov. 23, 2011.

Since the collapse of Lehman Brothers Holdings Inc. in 2008, rich countries have been traversing one of the roughest economic patches in decades. At the same time, emerging nations that were once considered hazardous bets — from Argentina to Thailand — by some measures are more stable than their developed counterparts.

Although some investors are advising caution concerning emerging markets, Warren Buffet’s Berkshire Hathaway has been making significant investments in companies based in emerging markets. A March 2011 report published by Reuters detailed some of Berkshire Hathaway’s emerging market investments.


Billionaire Warren Buffett’s Berkshire Hathaway Inc. struck a deal to buy lubricant maker Lubrizol Corp for $9 billion in a bet on industrial growth in emerging economies.

The deal is Berkshire’s biggest since it bought Burlington Northern Santa Fe for more than $26 billion in late 2009. It extends the trend of Berkshire expanding in basic industries, which includes Buffett’s recent deals for conglomerate Marmon Holdings and Israel’s Iscar Metalworking.

The key to making safe and profitable investments is that same as it has always been; do your homework!  Wise investing cannot be a seat-of-your-pants undertaking. Large investment firms have thousands of well-informed employees who are dedicated to making money for their employer and for their clients.  Individual investors do not always have access to the best and most current investment information available.  Global markets are constantly in flux, so whether you are a large investor, or an individual investor hoping to make a good return, make sure you seek the best possible advice before investing your hard earned money.

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