Everywhere you turn people are talking about Emerging Markets.
They say things like, are Emerging Markets going to outperform US stocks?
So today we're going to shed some light on Emerging Markets we're going to figure out
what they are and will they actually emerge and it's all going to go down on this episode
of Real Vision's The One Thing.
What's going on investors.
AK, here.
The term "Emerging Markets" was actually introduced in 1981 by a guy named Antoine van Agtmael.
He worked to buy IFC which is part of the World Bank.
So Antoine originally pitched the fund that invested in countries like Brazil, India,
and South Korea as the World Fund.
He presented this idea at a Salomon Brothers event with a bunch of fund managers and they
loved it.
But they hated the name.
So it was renamed to the Emerging Market Fund, which is much easier to sell than what Donald
Trump once called it, the Third World Shit Hole Fund.
And so Emerging Markets were born with a phrase that had so much hope and positivity that
you would hope they would emerge eventually, right?
Well, here we are in 2019, 38 years later, and most investors have some sort of exposure
to Emerging Markets in their portfolio.
Emerging Markets almost act like the technology sector; they add a high risk, high growth
area into your portfolio.
One of the most popular funds that you may know is EEM, which is the iShares Emerging
Markets Fund.
EEM is made up of a bunch of large cap companies from Emerging Markets like China, Korea and
Brazil.
But what are you actually buy when you're buying EEM?
Well, Christian Fromhertz, the CEO of Tribeca Trade Group, came on a Real Vision recently
to discuss what's inside EEM.
What I want to talk about is the components of EEM.
The countries, as well as the individual names that are in the EEM ETF.
I think that's always important just when we're looking at a US ETF or a sector ETF.
We don't want to just look at what the sector is but we want to know what companies make
up the sector because ultimately, that's what's going to drive the performance.
OK, so a top geographic countries.
If you could see it's a little bit weighted-- it's got a higher weighting to China.
You could see South Korea, Taiwan, India, Brazil.
These all make up over 5% of the ETF.
So it's a little bit weighted to China.
But if you take a look at what is going on within some of the groups, you could see Tencent
is the number one holding.
Baba is another large cap holding.
Taiwan Semi, that's EWT from the Taiwan ETF.
You could see that some of these companies you're familiar with.
So as you can see, when you're buying EEM, you're mostly betting on Chinese companies
and mostly Chinese tech companies at this point.
Tommy Thornton, a Real Vision regular and think tank contributor, is pretty comfortable
with that.
The biggest weights in the EEM primarily are financials and technology, and the countries
that are dominant are mostly Asian-- China, Hong Kong, Taiwan, and Korea.
There's others out there, but it really drops off with percentages.
But that's about 50%, right there.
The biggest weight, as far as stock component, is Tencent.
Tencent is a video game maker.
It's one of the largest companies in the world.
It was down 47% from its peak to bottom in the last year, which is just astounding when
you think about it.
But how have the Emerging Markets performed compared to the S&P recently?
Over the last five years, even counting last year's market sell off, The SPY's total return
with dividends is near 50%, while EEM is only a 3.5%.
That's really something you've got to consider when the last five years have been the most
bullish for Markets.
Well, except for last year.
It's important to understand that when you're investing in Emerging Markets, not only are
you investing in those companies, but there's also currency risk involved.
When you buy EEM the local fund manager goes out and buys these companies in that country's
currency.
And when you sell EEM they sell Tencent in Hong Kong, they get Hong Kong dollars.
There's also political risks that come with investing in those countries.
Just think about Brazil, which is the Emerging Market heavyweight.
They've been beaten down over the years because of their political problems.
But ever since President Bolsonaro promised to make Brazil great again, the stock market
has been on fire.
I mean, yeah, there's political risk in these Emerging Markets but there's also political
risk in markets that have supposedly already emerged.
Like the US?
Maybe the Eurozone?
In short, Emerging Markets are another example of why you should do your own homework before
you start investing.
There's a lot of moving parts, but if you can get it right, long or short, you're going
to get paid.
If you want help with that research then make sure you subscribe to Real Vision I'll talk
to you next week.