Will you be buying?
Fund managers and financial advisers have been bigging up emerging markets for so long it's easy to forget how badly these markets have performed lately.
Just look at China, future global economic behemoth. The average fund in the China/Greater China is down 10% during the last twelve months, according to MSCI. Over five years, the average China fund has delivered a pitiful average annual return of -3%.
Meanwhile, the US market has rallied 17% and even the UK has returned 6% over the last year. And UK gilts have thrashed them all, returning 29%. China hasn't made many investors rich lately. Especially if they put their faith in Anthony Bolton.
The other BRICs have fared worse than China. The Indian stock market is down 20% during the past twelve months. Brazil is down 14%. Russia is down 17%.
Rare bright spots include the Philippines (up 20%), Turkey (up 14%) and Mexico (up 13%). But few of you will hold much of your portfolio directly in these markets.
Worse, Most Emerging-Market Funds Are Lame Ducks, which means your chosen fund is more likely to quack like a duck than rampage like a bull.
A certain ratio
So, you should give up on emerging markets, right? Actually, wrong. Because recent lousy investment performance has had one positive impact.
Klaus Bockstaller, head of global emerging markets at Pictet Asset Management, has calculated that emerging markets now trade on a forward P/E of 10 -- which is well below their long-term average.
Given that fair value is typically assumed to be around 15 times earnings, now looks a pretty decent time to buy in.
I've dug up figures from Thomson Reuters, and these show China currently trading at just 7.3 times earnings. Russia is even cheaper, at a meagre 5.5 times earnings.
Brazil is trading at 11.5 times but India still looks relatively expensive at nearly 17 times earnings. Until recently, it was trading well into the 20s.
So yes, emerging markets do look better value. Their P/E ratios suggest they are cheaper than the US (15 times earnings) and UK (12 times). Russia and China are even cheaper than Spain (11 times earnings) and Greece (10 times).
So what are you waiting for?
Well… we all know the challenges facing emerging markets. China has been building roads to nowhere and cities with no citizens. India can barely keep the lights on, suffering a massive power cut that left 600 million people without electricity.
Russia is a corrupt oligarchy with only two things the world wants -- oil and gas -- and they could be sunk by the shale revolution. Brazil is battling against high interest rates, a pricey currency, excessive taxes and a second-rate infrastructure.
The BRICs are slowing, and could have a long way to fall.
3, 2, 1... lift-off!
Yet all this could work in your favour.
Emerging markets are now frantically easing monetary policy, slashing interest rates and investing in their infrastructure. Given their lower debts and superior growth, this money should roll up its sleeves and get to work, rather than squatting on banks' balance sheets, as QE does in the UK.
I still believe emerging markets are a geared play on Western growth. When we rise, they rise faster, when we fall, they fall even faster. If I'm right, when global stock markets finally start flying (and with the FTSE nudging 6,000 we may already have lift-off…), emerging markets could be an exciting place to be.
They are still risky, of course. That's less of a problem if you plan to hold for the long term. Especially since you are buying at a much lower price than a year ago.
So where to invest? Well, I'm wary of emerging-market trackers and ETFs.
Given the variable state of corporate governance, a tracker could buy a lot of nonsense. A good fund manager is better placed to outperform in emerging markets than in heavily-researched Western markets.
I would try to stick to investment trusts, because they typically have lower charges than unit trusts, but it isn't always possible. Specialist emerging-markets investment trust manager Aberdeen Asset Management (LSE: ADN) offers a spread of funds, including a Latin American, Asian Income and New Dawn offering.
If you can stand paying a 1.75% annual management fee, you might also consider unit trust Aberdeen Emerging Markets, which has returned an impressive 84% over the past five years, against 26% for its benchmark.
State we're in
Specialist Asia manager First State offers just one investment trust, but it's a good one, Scottish Oriental Smaller Companies (LSE: SST).
First State also offers several successful unit trusts, including First State Asia-Pacific Leaders and First State Greater China Growth. The latter has grown 60% over the last five years, against 20% for its benchmark index, but again, has a 1.75% annual fee.
You should also consider JP Morgan Chase & Co (NYSE: JPM.US), which boasts a bevy of specialist investment trusts, including JP Morgan Asian (LSE: JAI), JP Morgan Brazil (LSE: JPB), JP Morgan Chinese (LSE: JMC), JP Morgan Indian (LSE: JII) and JP Morgan Russian Securities (LSE: JRS).
JP Morgan's annual fees are lower at 1% a year, which I like. What I don't like is that it slaps on performance fees, a hefty 15% of any outperformance, capped at 2% of the trust's total assets. You may not like that either.
Suffice to say, don't pile into emerging markets expecting the glory days to suddenly return. But don't ignore them either, especially at today's low prices.
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> Harvey owns Scottish Oriental Smaller Companies and First State Greater China Growth.