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STA Weekly Report – Avoiding Home Bias Through Emerging Market Exposure

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INSIDE THIS EDITION:
Avoiding Home Bias Through Emerging Market Exposure
STA Money Hour – Investing 101 with Kids
Portfolio Stress Test
401k Plan Manager

Most investors in public stocks have heard of emerging markets and the issues they can experience from time – out of control sovereign debt, currency fluctuations, out of control inflation, and political turmoil.

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Just look at the chart below. While it plots the U.S. Dollar Index, it also shows the many times since the 1960’s that emerging market economies have experienced crisis.

It is no wonder why so many investors are inclined to shun emerging market investments. Not only are they often associated with crisis, but they also tend to feel unfamiliar compared to investments domiciled in the United States. This leads to investors having a home-country bias in their portfolios, which we would argue is a dangerous proposition from two points of view – diversification and future expected return.

There are approximately 24 countries that are classified as emerging markets. They cover the spectrum in terms of geographic location and size. However, the majority of these markets are gradually transitioning from an agrarian economic base to one dominated by manufacturing. The shift has big implications across all markets, but none is greater than the emergence of a middle class in these countries.

As the middle class grows, it typically means higher wages and more consumption in the emerging world. The chart below shows the impact of the growing middle class on consumption in a select number of developed and emerging markets. The standouts are India and China which by 2020 are forecast to see consumption by the middle class grow considerably. 

Source: Smith & Howard

There is also a growing need for services in emerging markets that will help sustain economic growth and increasing levels of prosperity. From an investors point of view, this is a good thing as it provides fertile ground for finding investment opportunities across sectors, allowing for better diversification.

The U.S. makes up a relatively small percentage of the world’s economy. As a result, ignoring international and emerging markets eliminates a large swath of the available opportunity set and keeps investors from capitalizing on nearly 75% of the world’s economic output.

With a wider opportunity set and higher expected returns going forward, investors would be wise to maintain an exposure to emerging markets. However, because these economies are in various stages of their growth and development they each present their own set of risks. It is why to be invested in emerging markets requires sound risk management and discipline that allows for volatility within a range, but not allow a position to decline so much within a portfolio that it is hard to recover from.

China as a case study

China is the biggest and best example of the impact that economic transitions can make. The Chinese economy over the last decade has seen a boom in the service sector, migration toward cities and the increase of economic mobility. Of course, economic and political reforms have played a role, but the natural demand for services and new ways of doing business have intensified the rate of change and the overall access to investments in this market.

Investors have as a result enjoyed solid investment results for the better part of two decades. However, to get those results, they have at times had to accept higher levels of volatility.

While not every emerging market will have the same return profile as China has had, it does serve up a useful reminder: Emerging markets can perform well over time but over periods can experience high levels of volatility. For investors, it is thus very important to keep in mind that accepting higher volatility is oftentimes the price you pay for that higher return profile.

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)


Investing 101 with Kids
Friday, May 10th, 2019

Luke Patterson hosts a very special STA Money Hour, as we welcomed guest hosts Jacob (age 10) and Jackson (age 7) to talk about the basics of a good financial plan. Luke Patterson chatted with the boys about starting to save, and the earlier the better. Luke explained the power of compounding interest and having goals when it comes to your money.

Listen Here


STA Wealth Management – Portfolio Stress Test
By Scott Bishop, MBA, CPA/PFS, CFP®
Executive VP of Financial Planning

Although the markets have had a nice run since bottoming in March of 2009 (after the 2008 Global Crisis – see chart below), many are feeling that they are due for a correction based on time, valuations, “headline” risks, etc. 

Click Here to Read Full Article



Important Disclosure:
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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