In recent years, the Oppenheimer developing markets have disappointed investors as stocks fell to sluggish export growth, weak commodity prices and political disruption. What followed has been a negative return of 11 percent for the Oppenheimer developing markets since mid-2011. The potential for profit exists. Still, you have to know how to use the Oppenheimer developing markets index to invest wisely.
We have witnessed a reverse of this trend now where the market equities rallied 12 percent, and the steady Chinese growth has driven it.
What Are Emerging Markets and How Can You Profit?
Emerging markets have a smaller economy that grows faster than economies of the developed world. Because of this, the potential for profit skyrockets. An emerging market has some characteristics of a developed market, but it does not meet all the standards to be fully developed. These markets will normally provide investors with better diversification.
Taken from MSCI index data on December 31, 2016, the emerging markets have small cap stocks of more than double in the standard universe. For example, you have 1,906 vs. 834. Because these stocks had less coverage than their larger counterpart, the opportunity for mispricing arises.
Unlike the broad index where a few firms with a similar profile dominate the market, the Oppenheimer developing markets are concentrated less heavily, which allows for diversification. For investors, who want more exposure to domestic demand with emerging market investments, you have greater exposure to healthcare, consumer discretionary and the real estate sector.
These markets emphasize less on the energy and financial markets, and the companies provide protection from potential trade restrictions like when a new White House Administration takes office, or Congress imposes new laws to regulate a market.
Looking at it from a more regional perspective, when you invest in the Oppenheimer developing markets, you have more exposure to some of the lucrative economies of India, Korea, and Taiwan. At the same time, you have less exposure to other economies like Russia, Mexico, South Africa and Brazil.
The IMF 2016 World Economic Outlook reports that when we examine the emerging Asia market, we will discover one of the healthiest and quickest growing economies in the world. Historically, the smaller companies have always performed better than the larger corporations for investors. While not always the case, this market had a lower standard deviation.
Tips to Profit from the Oppenheimer Developing Markets
Tip #1: Invest 30 Percent of Your Stock Holdings in Foreign Names
Emerging stocks have rocked the economic world and been a revolutionary place to make money for smart investors. Look at this way. Do you want to sell to consumers in China or Brazil who have jobs and zero debt with annual wage growth? Or do you want to do apply this approach to consumers in Western Europe and the US where the wages aren’t growing, and people are often in debt? The answer seems obvious, and the potential in these emerging markets continues to skyrocket. The risk exists, but the higher the risk, the greater the reward.
Tip #2: Look at the Shares Malaysia Fund
From 2014 to 2015, the IMF expected Malaysia to have a surplus of more than 4 percent in GDP. Even more interesting, that figure could actually be lower because Malaysia has a more modest approach to oil exports. According to the IMF, Malaysia could see a growth of more than 5 percent in the coming years.
Fairly impressive considering Malaysia sits in the middle of the income scale with an average $17,500 GDP per capita. One thing to understand when investing is how the poorer countries will often grow much faster than the richer countries.
Tip #3: Diversifying Not as Important
When you diversify in an emerging market, it has less benefit than in the developed world where you experience negative correlations with equities and bonds. Taking your cash to the Oppenheimer developing markets, they will have a massive correlation. Important to remember these markets link to the government, and as these equities drop, the bonds lose around 20 percent. After fees, it equates to a 33 percent loss.
Tip #4: Past Growth Does Not Always Equal Future Returns
Many times, you hear the conventional investment advice that a company that did well in the past will do well in the future. This perception in emerging markets can cost you. It might be true that US companies have made an annual 10 percent growth figure over the last ten years. Still, emerging markets have not always done as well based on history.
Tip #5: Do Not Use Index Funds
investor Tim Maverick says he does not like index funds in general. This becomes true especially in the emerging market. Why? First, the indices restrict your investable universe. Second, these stocks usually include the most overvalued and overbought stocks on the market. To give an example, a report from the Institute of International Finance found how just $7.5 trillion in a total of $24.7 trillion were covered in emerging market equities through indices.
Tip #6: Look for Local Exposure
For those who really want exposure to developing markets, they will first need shares with local companies. Avoid what many US advisers have said like having sole exposure through a multinational company. This does not give you the best exposure to the economic growth of a developing market. If you want to profit from a specific foreign trend, invest directly.
Tip #7: Look Past Closet Index Trackers
Even when you look past the index funds directly, you still have what’s known as “Closet trackers.” These are fund managers who play it safe. Also, they do not care to outperform the benchmark index for shareholders. It’s a waste of money from the investors’ point of view because you pay for active management, but you do not get it.
The Oppenheimer developing markets can be a lucrative place to earn money. But first, you need to understand how it works and what not to do. If you enjoyed the content of this article, and you think it may help others, feel free to share the article.