There is an old investment saying, “Buy low, sell high”, which we have little difficulty following in most aspects of our lives. For example, when sales are on in the shops, we rush out to snap up bargains, but, surprisingly, we don’t follow this policy when investment markets are depressed and prices are low.
At such times, the news is so awful that investors are afraid to invest. In many cases, they actually sell out at these depressed prices for fear that prices may fall further. To our dismay, some time later prices rise and the news starts improving. Before long, we hear friends or work colleagues talk about the gains they have made and we re-enter the market, buying stocks at significantly higher prices than we sold them at previously. Unfortunately, our natural instincts have lead us to buy when prices are high rather than low.
At the moment, markets have had a reasonable run and are generally fairly priced, but, for those bargain hunters among you, there are certain markets that are now on sale, namely emerging markets – China, South Korea, India, Brazil, Russia, Indonesia, South Africa, Mexico, Turkey etc. These have been struggling of late and are now very cheap compared to developed markets. This is mainly because foreign investors have been withdrawing funds from these markets for a number of reasons, including unrest in Thailand, Turkey and the Ukraine and worries about the possibility of a spill-over into other markets.
Emerging markets may well continue to decline but their underlying economies are still doing well and have good growth prospects. For example, China is growing at over seven per cent per annum and these markets as a group are expanding at over four per cent per annum. However, the respective stock markets do not reflect this potential.
How can you get exposure to these growing economies? You could invest directly in a select number of companies but this requires a fair amount of research to make the right choices. It is far simpler to invest in an emerging markets fund, which will give you exposure to all the major emerging markets listed above. Some of these markets may struggle but the ones that do well should more than make up for the laggards.
Many of the greatest investors argue that buying when others are desperate to sell and selling when others are greedily buying requires nerves of steel and pays the greatest return. In the circumstances, it makes sense to adopt a cautious approach and to start drip feeding money into these markets, as we may not yet have hit rock bottom and it will probably take some time before investors return in force to drive these markets higher.
This opportunity is not for everyone, particularly those of you who plan to retire shortly or are risk averse, but for those of you with a longer time horizon (over 5 years) it is worth considering allocating some funds here.