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Wealth Watch: Thrill-Seeking Markets
Attention, adrenaline junkies! Do you miss the exhilaration of 2009, or maybe that thrilling after-party in late 2011, when the stock market had a fun way of bouncing around 2 percent or more in a single day? Sure, we got a taste of those wild old days last week, when the S&P 500 dived 2.5 percent on June 20, only to rebound 2.5 percent this week. The rest of 2013 has been a bore. Though the U.S. VIX volatility index spiked last week, this year it's remained 71 percent below 2011's levels.
If you really want your investments to provide thrills and chills, the place to be is emerging markets. Take Brazil, where the stock market has cratered 22.5 percent this year. China's Shanghai Shenzhen index has plunged 15.6 percent in June alone. The 21-country MSCI Emerging Market index has dropped 12.8 percent this year -- including a 4 percent dive on June 20.
"Biggest Contrarian Play"
Many investors are scared of these places, fearing inflation in developing countries or a slowdown in Chinese growth. A BofA Merrill Lynch survey this month of 248 managers of funds totaling $708 billion in assets found emerging markets were their least-favorite spot for investment over the next year, scoring their lowest reading on record.
And yet, sarcasm aside, you don't need to be a thrill-seeking masochist to consider emerging markets as opportunities these days. You just need to be brave. In noting the survey results, BofA chief investment strategist Michael Hartnett said evidence suggests "the market has over-positioned itself for a shock from China," making such assets "the biggest contrarian play in the market today."
"It's a good time to start dipping your toe in the water," says PNC Wealth Management investment director Joe Jennings. Don't move too quickly -- emerging market stocks could offer even better bargains before they rebound -- and don't overdo it, Jennings says. He advises keeping emerging markets to about one-fifth of your total international stock exposure.
The tried-and-true argument for emerging markets is that they diversify your portfolio, giving exposure to fast-growing economies and a variety of currencies. Right now, the key argument for emerging market stocks is that they're on sale. Fleeing risk, investors have abandoned good stocks simply because they're located in riskier parts of the world, says OppenheimerFunds' Jerry Webman. "It's a good time for people to go looking for very strong companies with great prospects that happen to be domiciled in emerging markets," he says.
For ordinary investors, the timing may be good for another reason. Those who buy now should know exactly what they're getting. As the last year has made clear, the emerging economies in Asia, South America, Eastern Europe and elsewhere offer up stocks that are extremely volatile and only sometimes live up to their hype.
This essay originally appeared in Bloomberg.com's weekly personal finance newsletter, Wealth Watch. Sign up here.