The Valor Blog.
Investment News and Views, Direct from Our Team.

Market Correction

Emerging markets are taking a beating, but is now the time to invest in emerging market stocks?

I have found it fascinating that those who are in charge of managing clients monies debate such issues. Managing money has very little to do with trying to pick the next high growth economy and far more to do with finding companies that have close to 0% probabilities of ever losing you money over the long term. Unfortunately highly intelligent minds spend countless hours debating which nation is going to be the next “growth spectacular” and where to invest in these immature stock markets.

Anyone who has passed year 8 mathematics knows that losses in the first few years of a series of payments have significantly more weight than growth in the latter years. The secret of growing wealth is not about growth at all, but about not losing money (with growth as a muted factor of the discounted cash flow) .

Emerging markets are riddled with fraud, corruption, hidden debt, unknown franchises, volatile currencies and political risks. Its a bit like playing black jack, the dealer has 20, you have 19, and there are only picture cards left in the deck. As they say in the Hunger Games books “may the odds be ever in your favour”.

The Chinese have invented new ways of cheating westerners out of their money over the last few years. The accounting “issues” (to put it lightly) are just the tip of the iceberg. I think the 6 month reprieve the Chinese audit firms have been given is extremely generous.

India has enormous structural issues that are likely to hamper investment for longer than most peoples time horizon.

For the macro investors who enjoy guessing about emerging market economics, now is a far better time to invest than a year ago, however I believe that the probabilities of these kind of investments are far closer to flipping a coin than being a true fiduciary of clients monies.

Is there going to be economic growth in emerging markets over the coming decade? Highly likely. Is investing directly in these “cockroach motel” (Jim Chanos on Chinese stocks) markets wise? Probably not?

Are wonderful multinational companies with proven brands and strategies likely to continue to grow their earnings in emerging markets over the next decade? Highly likely?

Is now a better time to invest in wonderful multinational companies with emerging market exposure? Highly likely.

Is investing in companies that are based on China continuing to borrow $3 for every dollar of fixed asset growth the most obvious place to avoid? Very probable.

How bad will China’s “hard landing” be? No one knows, however if we spend considerable time avoiding companies directly affected, then we are likely to continue to outperform over the medium term.

For those that are true long term investors, then the market corrections are enjoyable periods. For the insane that are margined to the hilt in these markets, I am unaware of any religion that may help you if volatility continues.