Developed Versus Emerging Weighting Shifts


Do emerging stock markets continue to offer greater opportunity than  developed markets?

For decades we have maintained a 70% developed market and 30% emerging market stock balance.  Emerging markets usually bring a higher return but have been more volatile.

A study by Keppler Asset Management shows that since 1989, using MSCI national market indices as hypothetical investment vehicles (prior to 2003, S&P/IFCI national market indices), emerging markets have performed the best by far.

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The chart above shows the Keppler Top Value Emerging strategy returned 19.0% compared to 12.1% for the developed markets  (green in the chart below).

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Michael Keppler and Peter Encinosa, authored a report “How Attractive Are Emerging Markets Equities? The Importance of Price/Book-Value (P/B) Ratios for Future Returns,” which appeared in the Spring 2017 issue of the Journal of Investing.

That report showed that up to the final quarter of 2016 the P/B ratio of the MSCI Emerging Markets Index ranged from a low of 0.90 in January 1989 to a high of 3.02 in October 2007, and averaged 1.75.

The report  shows:  When the P/B ratio was below 1.22, the average annual return in U.S. dollars in the four years that followed was 12.9% and never fell below zero.

When the P/B was between 1.22 and 2.76, the average annual return in the four years that followed was 9.4%.

When the P/B ratio exceeded 2.76. The average annual return in the four subsequent years was -5.1%, and was always negative.

Clearly emerging markets had through 2016 provided better long term returns, but had also been more volatile.

However during that period, emerging P/B values had normally been better.

In 2017 I noticed emerging and developed P/B values come closer together and warned Pi subscribers of this change.

The question I am asking today is, should we maintain the 70%-30% balance?

Articles such as the recent Reuter’s article, “Pandemic upends emerging market investment thesis” (1) suggest we must ask this question.

emerging markets

The article says: Typically, the path of economic growth in emerging markets has remained detached from developed markets – outperforming during periods of strong global growth such as the years before and just after the 2008 global financial crisis.

That growth differential has also helped suck in trillions of dollars of capital flows, including $311 billion in 2019.

But the coronavirus pandemic is testing that thesis. China’s economic recovery has roared ahead of most developed countries, but also of developing markets such as South America which is still grappling with high numbers of virus cases.

And even as economies begin to get back to normal, trend growth – already on a downward trajectory before the pandemic – could be eroded further as global supply chains suffer potentially irreparable hits.

The Institute of International Finance said that while trade across emerging markets is starting to recover, limited social safety nets, healthcare capacity and less scope for aggressive macro policy easing meant in many ways they were facing tougher economic challenges than their developed peers.

The Top Value Model Portfolio holds the eight “Buy”-rated markets Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom at equal weights.

The table below shows how the Developed Markets Top Value Model Portfolio compares to three alternatives at the end of September 2020 based on selected valuation and return measures:

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The Top Value Model Portfolio continues to hold the ten markets of Brazil, Chile, China, Colombia, the Czech Republic, Korea, Malaysia, Mexico, Russia and Taiwan.

keppler 10-2020

According to Keppler’s analyses, the Developed Markets Top Value Model Portfolio is now undervalued by 41% compared to the MSCI World (Standard) Index.

The Emerging Markets Top Value Model Portfolio is undervalued by 45% compared to the MSCI World Index.

The charts above show that the developed price-to-book (1.24 for developed-1.31 for emerging) is slightly more attractive, but the emerging average dividend ( 3.78% for emerging to 3.44% for developed) is a little higher.

In other words there is not any great difference in the values of developed versus emerging markets.

Since recovery growth in emerging stock markets might be slower than in developed markets, investors with shorter time spans (such as Boomers, especially early Boomers) might want to shift the weighting of their portfolios to hold a larger percentage of developed markets.

Gary

The Only 3 Reasons to Invest

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and elimination of stress!

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 19 shares and this position has hardly changed in three years.  During this time we have been steadily accumulating the same 19 shares and have traded only three times.

A model portfolio that dates back to 1969 has dramatically outperformed almost every stock market in the world.

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A hundred US dollars invested in that portfolio in 1969 is now worth $44833 compared to $100 invested in an equity weighted world index being worth $11,548.

This portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.

This portfolio more or less matched the S&P 500 until May 2018.  Then a stronger US dollar made the portfolio look like it was falling behind.   This currency illusion creates a special opportunity we’ll view in a moment.

This portfolio above is based on stock price to value analysis built around 91 years of stock market data.

The value analysis is used to create a portfolio of MSCI Country Benchmark Index ETFs that cover  stock markets that are undervalued.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage over $2.5 billion of funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) and most of his funds registered for the European Union, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael about 25 years ago, so I am one of the few Americans who receive this data and you will not find his information readily available in the US.

In a moment you’ll see how to remedy this fact.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Then Keppler takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not cause worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) market.

This is an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2020.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets: China, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the MSCI indicies of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund is at all times invested at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrated my 52nd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past three years, two more reports on investing (described below) and an online Value Investing Seminar right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the two reports and Value Investing Seminar as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.This year I celebrated my 51st anniversary of writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special seminar session looks at how to spot value from cycles.  Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

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The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $102 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Triple Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report, access to all the updates of the past two years,  right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the reports as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197 and receive all the above.

Your subscription will be charged $99 a year from now, but you can cancel at any time.

Gary

(1) www.reuters.com/article/emerging-markets-investment-idUSKBN2682BQ