A recent report from Goldman Sachs predicts that the S&P 500
will decline to 1250 by the end of the year, a 12% decline
from where it is now at 1416. Should this happen the S&P 500
would return to about the same level it was six weeks ago, at the
beginning of a month and a half long run which has made the summer
a bit more enjoyable for many investors, including emerging markets
investors.
[caption id="attachment_62864" align="alignright" width="300"
caption="The world famous Petronas Towers of Kuala Lumpur,
Malaysia"]
[/caption]
Assuming this does occur emerging markets investors have to be
wary of the impact such a decline in U.S. stocks will have on
highly correlated emerging markets stocks and ETFs. Over the same
six week period
EEM
(
quote
), has appreciated from approximately $37 per share to about $40.50
per share, a return of about 9%. This is a little less than the
S&P 500's return of 11% over the same period.
EEM also suffered a greater amount of volatility than the S$P
500 as seen in the following chart:
Despite the additional volatility and lower returns the
correlation between the two remains very high. Assuming
Goldman Sachs' outlook is accurate, investors holding EEM should
anticipate a decline of similar magnitude to the S&P 500. What
is an emerging markets investor to do?
Investors should actively manage their positions with stop-loss
orders. This way you eliminate the possibility that the irrational
part of your mind will override your discipline and convince you to
hold on to a declining investment longer than you should. A very
experienced investor may have the discipline in place, but we all
should have targets for every investment we make. When first buying
an investment you should be able to state firmly at what price you
will sell if the trade goes against you, as well as what price you
expect the investment to appreciate and then sell.
When you set a trailing stop-loss order on a percentage basis it
will adjust upward if the investment continues to rise. This allows
you to gradually "lock in" profits as the sell price eventually
exceeds your cost basis.
Another idea is to dig a a little deeper into the emerging
markets world and see which markets are already performing better
than the S&P 500. Again assuming the S&P drops as Goldman
Sachs predicts, and assuming conditions across emerging markets do
not worsen, it may prove wise to invest in specific regions or
countries.
Emerging Money recently talked about how
Malaysia's economy continues to do very well
.
EWM
(
quote
) is the only ETF dedicated to Malaysia, but many other ETFs have
exposure, in some cases a significant amount. The GlobalX FTSE
ASEAN 40 ETF (
ASEA
,
quote
) invests in members of the Association of Southeast Asian Nations,
which includes Malaysia at 30% of ASEA's portfolio.
I've also written about dividend paying stocks as a conscious
focus, given the expectation in developed markets for returns to be
lower for the foreseeable future. Dividends can be a
significant booster to total return. The WisdomTree Emerging
Markets Equity Income Fund (
DEM
,
quote
) has a dividend yield of 3.88%, and 10% of its portfolio is
invested in Malaysia. This makes it a good investment to address
both dividends as well as ensuring exposure to the better growing
economies.
While Goldman Sachs may well prove accurate in its year-end
prediction for the S&P 500, there are ways to invest with an
optimistic outlook. Investors should manage their risk, prioritize
faster growing economies, and target dividends.