Hidden Value in the Emerging Markets?

Are emerging markets worth looking at in 2014? Not too long ago, emerging market equities witnessed a pullback—when the taper talk came on the horizon. As a result, investors are asking if this has now created some value in these markets.

Before going into any details, investors have to keep one very important aspect of investing in mind: cheap doesn’t mean good value. Investors shouldn’t be interpreting falling prices as “value coming back to the market.” In some cases, this may be true, but in other cases, if the prices are falling, there’s a reason.

You see, emerging markets are going through some troubles, and as a consequence, their equity prices are a little vulnerable.

Also Read: NYSE 2014–2016 Holidays Schedule

For example, India, the third-largest economy in Asia, reported a decline of 9.6% in 2013 auto sales. This was the first decline in auto sales since 2002. This well-known emerging market is struggling with high inflation and low economic growth—or a period commonly referred to as “stagflation.” In the fiscal year 2013, India’s economic growth was the lowest in almost 10 years, and inflation is running at 10%. (Source: Choudhury, S., “Indian Car Sales Slump for First Time in a Decade,” Wall Street Journal, January 9, 2014.)

China, another major emerging market, has been seeing its fair share of trouble as well. This year the country is expected to post growth that’s nothing like its historical average. In December, the HSBC China Manufacturing Purchasing Managers’ Index (PMI)—a gauge of manufacturing activity in the country—declined to a three-month low. (Source: “HSBC Purchasing Managers’ Index Press Release,” Markit Economics web site, January 2, 2014.)

Brazil, a common name when investors talk about emerging markets, is no different. Moody’s Investors Service said that it could cut the ratings of the country if the economy “disappoints” in the first half of 2014. In 2014, the rating agency expects the Brazilian economy to grow by only two percent. (Source: Pariz, T., “Moody’s could cut Brazil rating outlook if economy disappoints,” Reuters, January 6, 2013.)

Mind you, these are only a few of the many emerging markets that are facing some headwinds; there are others that are holding onto growth by a thread.

With all this said, here’s my take on the emerging markets: they can be very profitable for investors in the long run, but in the short run, they might face some rough roads. Some positive things about emerging markets are their need for infrastructure, their population, the rise of their middle class, and their need for services. If the prices fall, investors may be able to scoop up better companies at lower prices.

Investors who are looking to invest in emerging markets may easily do so through exchange-traded funds (ETFs) like iShares MSCI Emerging Markets EEM. Through this ETF, investors can get exposure to not just the bigger emerging markets, but many other smaller ones as well. But just a word of caution: emerging markets can be volatile, so be sure to only invest a certain portion of your portfolio in this area to protect your wealth.

This article Hidden Value in the Emerging Markets? was originally published at Daily Gains Letter