A Bear Case on Emerging Markets

Hello, and happy Wednesday. It’s good to be back enjoying stonks after a two-week break!

To anyone who got a front-row seat to the eclipse in cities like Eagle Pass, Texas, or Little Rock, Arkansas, I hope you wore your glasses.

This is not investment advice and is intended for entertainment purposes only.

A Bear Case on Emerging Markets

I had to turn off the Credence Clearwater Revival while I wrote this so I didn’t get too “ra-ra” American and could write an unbiased bear case (oxymoron?) about emerging market stocks.

Before we get crackle-lackin’, let’s talk about a bear case:

In investing jargon, to be bearish on something is to have an overall negative sentiment or think something will underperform the market. The opposing term is to be “bullish.”

Think of the “Charging Bull” located in New York, New York.

What qualifies an Emerging Market?

Emerging markets (EMs) are economies with some characteristics of developed countries but are transitioning from a pre-industrial economy to a modern, industrial economy with an overall higher standard of living.

They typically can be more volatile and have greater political or regulatory risk than Developed Markets.

But to keep it simple, let’s just compare EM stocks to U.S. stocks today.

Investors seek to take advantage of the potential growth and volatility in the EM space because typically higher risk = greater returns… and EM is a higher risk space.

Overall Basis

There’s been some Emerging Market versus Domestic conversation in the social financial world lately so I felt as if we should address it here.

When you look at the last decade, the S&P 500 is up 12% in average total return not adjusted for volatility.

Emerging Market Stocks are up 3%.

Already off to a tough start for non-domestic companies.

Why do U.S. stocks outperform?

The political environment in the United States allows for industry to grow with less risk than companies in other countries have to face.

With indices like the S&P 500, you are investing in the economic consistency the United States provides. This is essentially investing in GDP Growth.

With emerging markets, you can’t invest in GDP growth to the extent that you can with U.S. companies. You really have to be selective on the specific companies that will be able to withstand more volatile economic landscapes that companies in the United States don’t have to account for.

Some Quick Food for Thought

A brain dump of three major countries that fall into the EM description that have some popular stocks for U.S. investors:

1. India: Has a lot of winners right now but you face currency and political risk in the long term.

2. Taiwan: Seeing some major wins in the semi-conductor industry ($TSM), but also faces major political risk with bordering country China.

3. China: A major loser this year in terms of market performance. I personally had to close out of a lot of my Chinese Companies because I couldn’t justify the performance difference between my U.S. stocks and my China holdings.

Weekly Tidbits

• Mooning: The Eclipse came to town this Monday… and drove an estimated $6 Bil to GDP per Bloomberg.

• Your $7 latte from a Gen Z-Hipster Barista may be getting pricier: Coffee bean prices are up 68% in the past year, hitting record highs right in tune with Cocoa prices. Climate challenges have made tougher growing environments for these commodities and the prices are reflecting that.

• Hoop Dreams: March Madness is over but extreme growth in women’s basketball is just beginning. Congrats to South Carolina for being the Women’s champ and to Uconn for winning on the Men’s side. It’s back to watching NBA players exert no effort on defense for us basketball fans.

Meme of the Week

Credit @optionscjp