Important Considerations In Emerging and Developed International Markets

The Premise

What is international equity? And how much of it should you include in retirement plan? It’s a complex international environment, filled with investment opportunities to help you and your employees achieve their retirement goals. In fact, acquiring international assets is a great way to diversify.

But how, and where? There are literally tens of thousands of investment opportunities in many distinct economies each with its own complex mix of economics, politics, accounting and currency environments.

That said, a well-designed, rigorous process can help to identify and capitalize upon these opportunities. This paper covers four considerations:

The Classification of Emerging and Developed Markets

Many assets are ‘objectively’ defined, meaning they’re grouped by, say, capitalization or security types. It’s a good way to select equities, but it requires a solid understanding of index classification schemes and composition, beginning with how ‘emerging’ and ‘developed’ markets are defined.

Morgan Stanley Capital International has a widely accepted classification scheme that buckets countries into emerging or developed based on things such as size of capital markets, liquidity, openness to foreign investment, among other criteria.

International Growth Factors

Most of the fundamental factors that indicate long-run economic growth – land, natural resources and people – are found in emerging market countries.

Remarkably, people (demography) are an undervalued resource, which, in turn, creates great opportunities for the long-term investor.

International Equity Valuation Frameworks

Growth factors are just a part of the equation; price points are another. Frameworks help answer the question, “what should international investments cost?” One such framework is the equity capitalization-to-GDP, which says the greater a country’s economic production, the bigger its stock market value. Price-to-cash-flow is another framework, which can use any can be helpful in providing a big picture of current capital market conditions.

The Role of Financial Markets within the Greater Economy

If you invest in an emerging markets mutual fund (or ETF), you’re investing in a country’s publically-listed equity market, not in in the country’s GDP growth rate or monetary policy. The role of the financial markets within the greater economy attempts to answer this question: “How does the [latest economic event] directly affect the underlying business dynamics of the companies listed on [emerging market country’s] exchange?”

Download the free whitepaper “Important Considerations in Emerging and Developed International Markets” now. The four considerations discussed in this paper have applications that apply to the appraisal of many other areas of the international equity investment process.