Emerging Markets Might Not Be As Cheap As People Think (Edited Version :) )

Emerging Markets Investment Outlook - 2026

Key Concepts: Emerging Markets (EM), Value Investing, ETFs, Correlation, Risk Assessment, Commodity Exposure, Circle of Competence, Absolute Cheapness, Taiwan Semiconductor Manufacturing (TSMC), iShares EM ETF, Riotinto, Pabray Veans Fund, Caspie, JDcom.

I. The Allure and Historical Performance of Emerging Markets

The speaker begins by highlighting the potential of emerging markets, particularly in Asia, citing a population of 4.5 billion with relatively low economic development and a projected growth rate of 5% annually. This combination of growth, population demographics (youthful population), and low valuations is presented as a compelling investment case. However, the speaker immediately cautions that this narrative has existed for two decades, and only investors who entered the market in 2003 have consistently realized substantial returns. Timing is crucial, and subsequent entrants experienced varying degrees of success.

II. Portfolio Characteristics & Risks of EM ETFs

A detailed look at the iShares Emerging Markets ETF reveals a trailing yield of 2.18%, slightly better than the S&P 500’s 1.14%, but still in the low single digits. The ETF’s top holding, Taiwan Semiconductor Manufacturing (TSMC), represents 11% of the index. This concentration introduces a significant geopolitical risk – specifically, the potential for Chinese takeover of Taiwan. The speaker emphasizes that such an event would fundamentally alter the composition of the entire ETF. Furthermore, the ETF’s fees are 20 times higher than those of an S&P 500 ETF, adding to the cost of investment.

III. Alternative Exposure to Emerging Market Growth

The speaker proposes alternative ways to benefit from emerging market growth without directly investing in EM equities. These include:

• Oil: Oil prices are currently mid-cycle (between $60-$80, potentially higher or lower) and represent exposure to the increasing demand from the 5 billion people driving economic activity in emerging markets.
• Multinational Corporations: Companies like Apple have significant sales exposure to emerging markets.
• Commodity Companies: Riotinto is presented as a compelling example. A long-term trend analysis demonstrates a strong correlation between Riotinto’s stock performance and the iShares Emerging Markets ETF, offering exposure to emerging market dynamics without the direct risks of EM equity ownership. A more detailed commodity outlook is promised in a future video.

IV. Individual Stock Selection vs. Broad EM ETFs

The speaker acknowledges the possibility of identifying undervalued individual stocks within emerging markets. He references previous videos discussing:

• Pabray Veans Fund: A stock-by-stock approach to value investing.
• Caspie: A cheap financial provider in Kazakhstan, albeit with inherent risks.
• JDcom: Currently undervalued compared to historical prices and valuations.

However, he stresses that successful individual stock picking requires significant due diligence, potentially even relocating to the region. He cautions against blindly investing in the broad basket of companies held within EM ETFs, suggesting they often gravitate towards more expensive, rather than truly high-quality, assets.

V. Correlation, Macroeconomic Factors & Investment Considerations

Emerging markets remain correlated with developed markets (US and Europe). A downturn in developed economies will inevitably impact emerging markets, albeit with a time lag. The speaker highlights the challenges associated with investing in emerging markets, including knowledge gaps (language, culture, law), difficulties in asset protection, and the need for “absolute cheapness” to generate substantial returns. He notes that while emerging markets possess strong fundamentals, historical returns have not always been commensurate with their potential.

VI. The Importance of "Absolute Cheapness" and Circle of Competence

The speaker emphasizes the importance of “absolute cheapness” – finding assets significantly undervalued relative to their intrinsic worth – as a prerequisite for successful emerging market investing. He contrasts this with the current situation, where emerging markets are only “relatively cheap.” He advocates for focusing on investments within one’s “circle of competence,” suggesting that value opportunities can also be found in developed markets with a more thorough understanding of the underlying businesses and regulatory environments. He cites a previous video on undervalued Chinese companies as an example of a successful team-based investment when conditions were more favorable.

Notable Quote: “You want to watch paint dry. You want it to be boring and you want it to compound your wealth.” – emphasizing the need for patient, long-term investing in undervalued assets.

Data & Statistics:

• Emerging Market Population (Asia): 4.5 billion
• Emerging Market Growth Rate: 5% per year
• iShares EM ETF Trailing Yield: 2.18%
• S&P 500 Trailing Yield: 1.14%
• ETF Fee Differential: EM ETF fees are 20x higher than S&P 500 ETF fees.
• TSMC Weighting in EM ETF: 11%

Conclusion:

While emerging markets offer compelling growth potential, the speaker advocates for a cautious approach. Direct investment in EM ETFs carries significant risks, including geopolitical factors and high fees. Alternative exposure through commodities, multinational corporations, and carefully selected individual stocks, combined with a focus on “absolute cheapness” and staying within one’s circle of competence, are presented as more prudent strategies. The key takeaway is that simply investing in “the theme” of emerging markets is insufficient; a nuanced understanding of the risks and opportunities is essential for achieving long-term success.