Thread by @TihoBrkan

1/ Emerging Market valuations were quite attractive at the start of 2019. As a basket, or better yet said as an index, they were (and still are) poised to deliver decently strong returns for those willing to buy & hold.

Both charts thanks to @Callum_Thomas and @topdowncharts

2/ However, not all Emerging Markets are made equal.

Many investors out there, including some I personally know who are extremely successful for decades, think it is just ludicrous to group countries like Brazil together with China, and India with Poland (as an example).

3/ This weekend I want to look at the price action of some of the more important countries within the Emerging Markets.

I will be using long term MSCI data together with recent ETF data, dating back as far as possible. I want to focus on the major index weights.

4/ Chinese equities are the key component of the Emerging Markets index, without a doubt. China now makes up 33% of the MSCI EM Index. $EEM

Since the March 2009 lows, China has actually managed to achieve 10% CAGR. Not bad considering its still to exceed the 2007 peak.

5/ Grouping neighboring Taiwan and South Korea into the weighing equation, together with China, all three make up 57% of the index.

It is an understatement to say that these three economies are highly correlated and very much linked to each other — especially in terms of trade.

6/ Some analysts believe that South Korean exports are one of the best signals as to just how well the Chinese economy is doing?

Firstly, major exports include semiconductors, petrochemicals, machinery, automobiles, ships, steel, LCD and wireless communication devices.

7/ Secondly, major trading partners are China (25% of exports), ASEAN (14%), the United States (10%) & the European Union (9%).

Therefore, the export data is a great barometer of the global economy, how well China is doing and the health of the more sensitive emerging markets.

8/ The fact that Asian emerging markets such as China, South Korea, and Taiwan are shrugging off bad trade data and continuing to rally means the market price is discounting potential improvements in the future.

9/ The other big elephant in the Asian region is India. The weighting in the EM index as of today is just below 10%, but that could change over the coming 10 years.

Indian market also managed to achieve a 10% CAGR over the last 10 years, despite being in a lost decade.

10/ Indian market is also poised to break out of its long term range, which started back in 2007 — just before the subprime & Lehman default in 2008.

While not as cheap as China, South Korea or Taiwan on a valuation basis, India will be the key growth engine of the future!

11/ Taiwan market timing couldn't be any better if you ask me. This is one of the more IMPORTANT emerging economies, that no one talks about.

Last time EM entered a boom period, from 2002-08, Taiwan did not do much. It's been stuck in THREE lost decades.

Yes, three.

12/ However, this time around the Taiwanese stock market is breaking out and possibly entering a very important long term secular bull market.

With a weighting of 11.5% — which is poised to grow if the bull keeps running — this could be the ace in the sleeve for EM equities.

13/ Brazil is the only other "major" weighting, but it happens to be in LatEm — a place I am not personally very fond of investing.

My mentor used to say Latin America is a place capital usually goes to die. I'm not sure if I completely agree with him, but you get the point.

14/ As mentioned in the last weekends summary, my personal preference is sticking to financial public assets in North America & Asia.

Looking at the charts of Indonesia, Malaysia & The Philippines — it is clear they came out of a very powerful bull market which ended in 2013.

15/ Malaysia underperformed because it faced a one-two punch combo. First, the economic growth started slowing in the ASEAN region, but secondly & more importantly the Oil prices crashed in 2014/15 & into early 2016.

It's stock market remains around the same levels as in 1994!

16/ What most people don't know is that over the last 10 years, The Philippines stock market performed at around the same rate of return as the S&P 500. From March 2009 until March 2019 the CAGR was very close to 15%!

17/ Thailand is another market that outperformed the S&P 500 and the overall US equity market.

Furthermore, whether its The Philippines or Thailand, the performance from the 2002 bottom until the present day has been excellent.

18/ In Thailand's case a 20-year bull run from October 1998 until October 2018 has been one of the better global market performances of our lifetime.

It goes to show what can be achieved when you buy outright panic during the depths of the Asian Financial Crisis.

19/ So in summary — which road does one take?

A passive approach of just exposing some of your portfolio capital towards attractively priced EM index, especially emerging Asia?

Or a more active approach by picking those jurisdictions and countries which stand to outperform?

20/ My advice isn't fancy, nor cool.

It's rather boring.

As George Soros said, investing should be just that. If it's is exciting to you, you're probably doing it wrong.

With that in mind, my way to play the bull market in EM economies would be via a basic, cheap index.

21/ If you think you can outperform, give it a shot. Just keep in mind one thing:

"...over the 15-year investment horizon, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform on a relative basis."