I'm ready to double down on a recent prediction I made. On October 6, I predicted that emerging market stocks were primed for a long period of outperformance. So far, that prediction looks pretty good... But I think emerging markets are just getting started. Since I wrote to you on October 6, emerging market stocks have outperformed the S&P 500 by 40%. That is an increase of 13.73% in emerging markets versus the 9.78% increase in the S&P 500. There are three reasons I believe that emerging markets still have a long way to run... 1. Emerging Market Stocks Are Still Dirt Cheap Unlike the S&P 500, which is trading at very lofty valuations, emerging market stocks are clearly inexpensive. Every valuation metric points to emerging markets being the best bargain in the global stock market. Emerging markets are also the cheapest that they have been since 1999 – when there was an incredible buying opportunity. In the decade following 1999, emerging markets beat the S&P 500 by almost 10% per year. I can't guarantee that history will repeat, but with the way emerging market stocks are priced relative to the S&P 500, everything is set to make it happen. 2. A Decade of Underperformance Creates a Coiled Spring The big technology stocks of today have driven the S&P 500 through an incredible 10-year run. For months, I've been warning about how expensive some of those stocks have become. I don't want to say tech stocks have created an S&P 500 "bubble," but I'm not surprised when I hear smart people throwing that word around. While this Big Tech run has been happening, emerging markets have been getting no love from investors. While the S&P 500 has doubled over the past decade, emerging market stocks have gone nowhere. Yet while stock prices have languished, emerging market companies have continued to grow earnings and value. This sideways stock market movement is why the valuations on emerging markets are so compressed. At some point, the cycle will turn back in favor of emerging markets just like it did in 1999. When that happens, emerging market stocks could outperform for a long time. |
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