There are times when a cautious investor can take risks that a rough and ready speculator can not.
When the price of an asset has risen so far, it quickly seems to be cheaper by the day, it can be unwise for a short term operator to bet that the trend will change. An investor planning for long range can be sure, however, that what seems like a deal will pay off in the end.
Some depressed assets – in particular stocks in emerging or energy-related markets and other commodities or goods – are in compliance with the law, investment advisors say. They could offer great returns over the next few years, even though they are risky proposals in the coming weeks.
“Evaluation is a very important consideration for long-term returns, but it’s a terrible mechanism for buying and selling things,” said Russ Koesterich, chief investment strategist at the BlackRock fund management company. Find good values, but advise: “Do not let yourself be down to the minimum.”
Among the discounted investment groups, Koesterich prefers emerging markets. “It’s a universally hated asset class” that “underperformed for years,” he said.
He warned that while emerging markets in general are cheap, there is a big variation in prospects among individual countries. The best long-term bets, in his opinion, include India and Mexico.
Chris Brightman, a Financial Advisor at Research Affiliates in Newport Beach, California, highlighted in a recent report that emerging economic markets are related to others and their own story. They were negotiating less than half of the US stock valuation, based on a measure that compares prices with an average of long-term corporate profits, a way to offset fluctuations in the business cycle and less than 60 percent of the Own Average rating for the last 20 years.
Discrepancies have led him to calculate that emerging markets will return 7.9 percent per year for the next decade, net of inflation, against 1.1 percent for their US counterparts. It makes no claim on a shorter horizon.
“Shareholder speculators ask how I can be sure that stock prices in emerging markets will rise above stock prices in the United States over the next year,” wrote Brightman. “I think I have no clue as to the prospects for short-term price changes.” “I’m not speculating about price changes, I’m investing in building long-term wealth.”
On Wall Street, on the other hand, analysts and money managers are judged on how they do well in a given year or even quarter. This can cause people to point out the importance of recent performance when judging potential investments. As strategists of the HSBC note, recent history in developing markets is unfortunate.
The developing world “seems to have inherited a bad bond from the developed world, namely low growth and high debt,” they said in a report last month. They continue to say that the “delicate core perspective makes us cautious” and that “current assessments offer only limited opportunities on a very selective basis.”
HSBC recommends holding securities in China, India, Mexico and Taiwan and avoiding Brazil, Malaysia, South Africa, and Thailand.
HSBC strategists are not alone in their contempt. The latest Bank of America fund manager Merrill Lynch’s survey found that emerging markets are wary of any other business class than their average allocation.
Energy gains a second. Oil is trading about half of its price in the summer of 2014. Raw materials of natural gas and other raw materials have also been crushed, as are the stocks of companies that produce them.
James W. Paulsen, chief investment strategist at Wells Capital Management, expects to change. Poor raw material prices will stimulate economic growth, predicts, increasing the risk of higher inflation and interest rates. This, in turn, should bring raw material prices to recover, helping the actions of raw material producers at the expense of consumer-oriented businesses and the global market.
“I think the direction will change,” he predicted. There has been a massive tax cut in the form of halving commodity prices. Long-term, which is tremendously stimulating because 95% of the world’s consumers are raw materials, not producers. ”
By anticipating a recovery of raw materials, it encouraged investors to focus essentially on the other 5 percent by acquiring shares in economies where the production of raw materials plays an important role, such as Canada and Australia. Foreign markets are generally cheap and so are the raw materials, so investments that can benefit from recoveries in either of these can be particularly rewarding, he said.
Mr. Koesterich agreed that mining and energy stocks were cheap and “long-term value”, but it was less certain that value was available in the same raw materials, the main driver of producer stocks. That’s why it would prefer emerging markets, even though it is not in the hurry of cash.
“It’s the kind of thing to buy and put away for 10 years,” he said. “You can not do the least, but you know you’re getting a fairly cheap price.”