Q: I’m hoping to get your current thinking on emerging markets. If I look at VEE as a proxy I see maybe a 50% gain over 12 years plus a small dividend, not exactly setting the world on fire but “ok” I guess as a diversifier. Do you see any catalysts suggesting the next 10 or 12 years could outperform? What about short term downside due the U.S. election? History suggests the final months leading up to U.S. elections are not great for the market and can be choppy, this year should be a doozy. Emerging markets I believe can be sensitive to the U.S. economy and the U.S. dollar in particular? Your thoughts are appreciated.
5i Research Answer:
Many investors are ignoring emerging markets, and this in itself creates potential. They are very cheap vs historical levels. Much of the pain has come from a strong US dollar. When US interest rates come down this might be the catalyst needed. But we would expect heightened volatility for sure around the US election. It comes down to confidence. If US investors are confident, they will move some money to other countries. A strong US economy can 'pull' others along as well. The current 'the US is the only alternative' mentality may last longer, but we don't think it lasts forever. Thus, we think small exposure internationally still makes good sense overall.