Global Bargain Hunting: The Investor's Guide to Profits in Emerging Markets

by Burton G. Malkiel, J.P. Mei

Overview

A RANDOM WALK AROUND THE WORLD
With the same clarity and insight that made Burton Malkiel's enormously popular A Random Walk Down Wall Street an influential bestseller, Global Bargain Hunting shows nonprofessional investors how to reap investment profits from the tremendous economic growth potential of developing countries. Describing a variety of strategies, Malkiel and Mei show you how to significantly reduce investment risk and increase profit from an expected recovery in emerging markets. In this book you will find out:
* Why long-term investment is the key to financial success in emerging markets
* How to adjust asset allocation and risk exposure for a variety of life-cycle investment objectives (high growth, college expenses, retirement, etc.)
* Why low-cost, low-turnover index funds should be the core of a well-diversified international portfolio
* How emerging market bonds, real estate, and natural resource securities can help round out the portfolios of those with substantial assets
* The most up-to-date changes in the global financial landscape in a new introduction written especially for this edition

Product Details

ISBN-13:	9780684848082
Publisher:	Touchstone
Publication date:	07/09/1999
Pages:	240
Product dimensions:	6.00(w) x 9.00(h) x 0.60(d)

About the Author

Burton Malkiel holds the Chemical Bank Chairman's Professorship at Princeton University, and is the author of A Random Walk Down Wall Street. He serves on the boards of several major corporations, including The Vanguard Group, an investment company with over $450 billion in assets. He is former president of the American Finance Association. He lives in Princeton, New Jersey.

Read an Excerpt

Global Bargain Hunting

The Investor's Guide to Profits in Emerging Markets

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By Malkiel, Burton Gordon

Touchstone Books

Copyright © 1999 Malkiel, Burton Gordon
All right reserved.
ISBN: 0684848082

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Introduction to the Paperback Edition: Recent Crises Present Historic Opportunities

In the first edition of Global Bargain Hunting, we wrote not only of the large, long-run growth opportunities in the stock markets of emerging countries, but also of the enormous risks involved. We indicated how political and currency instability could sour many investment opportunities and how lawlessness and corruption made many emerging markets a particularly dangerous jungle. Unfortunately, investors in early 1998 experienced only the risks of emerging-market investing -- not the rewards. While the first edition was published after the initial currency devaluation in Asian markets, we did not foresee the magnitude of the meltdown and severe recession in the Asian markets during the first half of 1998 or the spread of the virulent Asian flu to emerging markets in Latin American and Eastern Europe.

Today we better understand the crisis that has gripped the developing world. Moreover, we can reassess whether the fundamental growth case for emerging markets remains intact. Our conclusion is unambiguous. The growth opportunities in emerging markets are perhaps as great as they were when we wrote the first edition, and the bargains appear to us to be better than ever. We are convinced that all investors with long-term horizons who are able to tolerate the volatility and risks so characteristic of these markets should hold a portion of their portfolios in emerging-market securities.

Few analysts foresaw the dramatic collapse that toppled emerging markets in Asia in 1997. Looking back, we can now see that the Asian Tigers and Tiger Cubs who had pegged their currencies to the dollar were becoming less competitive as the dollar appreciated. But inflation was low, and government budgets were more or less in balance. What is now very clear is that private borrowing by banks and corporations was excessive. Moreover, borrowing was often short- rather than long-term and was usually done in dollars rather than in domestic currencies. Overexpansion in industries such as computer chips and excessive real estate speculation could have been absorbed had they been financed more prudently. But they proved toxic as the initial currency depreciations made dollar-denominated debt even more burdensome and currencies even more suspect. The resulting panic led to an investor stampede. The abrupt reversal of foreign investment helped push these economies into a deep recession in 1998.

Complicating a resolution of the crisis and a quick recovery of the Asian economies was the continuing slump in Japan and considerable criticism of the role of the International Monetary Fund in bringing Asia back from a full-fledged collapse. Many investors concluded that the emerging Asian economies are nothing but a house of cards and that long-term investment in these markets is extremely unwise.

Our view is that the Asian crisis and its spread to Latin American and Eastern European emerging markets have created an unprecedented buying opportunity. No one can forecast whether the June 1998 lows in the emerging stock markets will prove to be the bottom. But the biggest long-term gains from equity investing are likely to come when the clouds appear darkest. While critics are now quick to dismiss the Asian miracle, it is well to remember that these economies have achieved increases in living standards in one generation that took several generations for Western countries. And even if growth rates in all emerging markets slow dramatically in the future, they are still likely to far exceed those for the developed world once a recovery begins.

Moreover, investment risks are by no means unique to emerging markets. Excessive risk taking, high financial leverage, and investor panic also exist in developed markets. The near collapse of Long Term Capital Management has certainly highlighted the huge financial risks that exist in today's global capital markets. While the U.S. equity market has continued its fourth consecutive year of 20 percent gains, it is highly unlikely that Wall Street can continue its high-wire act. With market valuations in the United States at their historical highs, it is certainly prudent for the long-term investor to take a closer look at emerging markets.

The fundamental strengths of the emerging economies remain intact. Labor costs are low, work ethics are strong, and the people are thrifty and have a commitment to education. Taxes are relatively low compared with those of the developed world, and entrepreneurs have sprouted like wildflowers. The recent currency depreciations have made these economies extremely competitive in world markets.

The chart that follows shows labor costs in some developed countries and some emerging markets. It is clear that products with a large labor cost component can be manufactured in emerging markets at a fraction of the cost to make them in developed markets.

1997 Hourly Wage Costs in U.S. Dollars for Selected Countries

Developed Countries
United States $18.24
Japan 19.37
Europe 20.46

Emerging Markets
Mexico 1.75
Portugal 5.29
Korea 7.22
Taiwan 5.89
Hong Kong 5.42

It is also the case that the currency depreciations suffered by many emerging markets during 1997 have dramatically enhanced their competitive positions. The "Big Mac" index illustrates relative price levels in various countries in the developed and the developing worlds. The exhibit shows prices converted to U.S. dollars for a big McDonald's hamburger. The index suggests that many emerging currencies are currently undervalued. Whether it be investment assets or products or services, the price levels in the developing world are far below those in the most developed countries.

Adding to the attraction of emerging-market investing is that valuation levels in emerging markets now appear compelling. Many well-managed and conservatively financed growth companies in the emerging markets of Asia and Latin America are now available at far more attractive valuations than those in developed countries.

A 1998 study illustrates the point. We selected forty-six matched pairs of companies -- one from a developed country and a counterpart in a developing country. For each pair we collected security analysts' estimates of the five-year growth rate of earnings as recorded by IBES, an international service that collects data from leading securities firms.

To judge the investment attractiveness of the companies, we used a measure popularized by Peter Lynch, the firm's growth-to-P/E multiple. We found that the expected five-year earnings growth rate for this representative sample of emerging-market companies was higher than that for the equivalent group of companies in developed markets. However, the P/E multiples for the emerging-market companies were substantially lower than the multiples for the companies in developed markets. Thus, higher growth expected from firms in emerging markets can be purchased at far more attractive valuations.

Equity investments in emerging markets are also great diversifiers since these markets tend to have low correlations with the United States and other developed-country markets over the long term. U.S. powerhouses see the current situation as ideal for global bargain hunting. GE chairman Jack Welch writes in his recent annual report that Asia "should provide us with a unique opportunity to make the strategic moves that will increase our presence and our participation in what we know will be one of the world's great markets of the 21st century."

Because investing in emerging markets was much out of favor in 1998, unusually attractive investment vehicles became available for individual investors. Closed-end investment companies that hold diversified portfolios of emerging-market stocks became available at discounts of 20 percent or more. For those with strong stomachs and a long-term horizon, commitments today are likely to prove extremely rewarding over the years to come. So join us on a global bargain-hunting adventure and learn how to access some of the most attractive investment opportunities of the new century.

Copyright © 1998 by Burton Malkiel and J.P. Mei

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Excerpted from Global Bargain Hunting by Malkiel, Burton Gordon Copyright © 1999 by Malkiel, Burton Gordon. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents
Introduction to the Paperback Edition: Recent Crises Present Historic Opportunities
Preface
PART I: THE RICHES TO BE REAPED
Chapter One:
Investment Opportunities Flourish Outside the Developed World
Experience from Recent Investors
Emerging Markets Around the World
Four Tigers: Hong Kong, South Korea, Singapore, and Taiwan
Three Tiger Cubs: Malaysia, Indonesia, and Thailand
One Dragon: China
One Elephant: India
The Flamingos: Latin America
And All the Rest: Eastern Europe and Africa
Consumer Markets in Emerging Nations
Chapter Two:
The Price Is Right on the Other Side
Stocks in Emerging Markets Are Bargains
The Home-Country Bias and the Likely Future Flows of Funds into Emerging Markets
Four Fundamental Reasons Why Rapid Growth Will Continue
Economic Freedom Is Everywhere
The People Are Smart and Thrifty
High Technology Has Already Arrived
The Financial Undergrowth Is Impressive
Could We Be Wrong?
Part I Highlights
PART II: THE DANGERS TO BE AVOIDED
Chapter Three:
Political Instability Can Sour Many an Investment Opportunity
Playing Russian Investment Roulette
Acting on the World Investment Stage
Survivorship Bias
The Mexican Roller Coaster
A Tale of Two Flies
Chapter Four:
Lawlessness Makes Emerging Markets a Dangerous Jungle
The Pervasiveness of Lawlessness
Con Artists Flourish in a World Without Legal Safeguards
MMM Meant Triple Misery for Russian Investors
Harshad Mehta: The Invisible Hand in the Indian Stock Market
Other Complications of Emerging-Market Investing
Chapter Five:
Volatility Guarantees a Bumpy Investment Ride
Taiwan Takes Its Ups and Downs
Happy Flying Crashes in China
The General Evidence on Emerging-Market Volatility
What Is a Global Bargain Hunter to Do?
Chapter Six:
How Diversification Can Reduce Risk
Diversification Provides Protection
Diversification in Theory
Diversification in Practice
The Gains from Global Diversification, 1985-1995
Further Gains from Adding Emerging Markets
Diversification in the Future
Playing the Home Team
Part II Highlights
PART III: HOW TO INVEST IN EMERGING MARKETS
Chapter Seven:
The Professionally Managed Approach
Types of Professionally Managed Funds
Paying Full Price and More for Open-End Funds
Finding Buried Treasure Among Closed-End Funds
Some General Rules for Buyers of Closed-End Funds
Choosing Particular Closed-End Funds
Taking Risks — and Profits — with Closed-End Funds Traded Abroad
Chapter Eight:
The Indexed, or Computer-Managed, Approach
The Case for Indexing
Constructing an Index: Some Important Issues
Evaluating the Efficiency of Emerging Markets
Indexing Wins Again
Available Index Instruments
The Vanguard Emerging Markets Index Fund
Other Index Products: World Equity Benchmark Securities (WEBS)
Chapter Nine:
The Self-Directed Approach: Actively Managing Your Emerging-Market Portfolio
Pitfalls of the Self-Directed Approach
Gearing Up
Seven Investment Tips
Tip 1: Look at Regions, Not Companies
Tip 2: Use Price-Earnings Ratios and Dividend Yields to Find Investment Bargains
Tip 3: Overweight Markets with Low Price-to-Book-Value Ratios
Tip 4: Watch Out for False Bargains
Tip 5: Pick Countries Where Political Risk Is Subsiding
Tip 6: Trade as Little as Possible
Tip 7: Prune Your Hedges Severely
Some Final Advice
Chapter Ten:
Bargains in Bonds, Real Estate, and Natural Resources
Emerging-Market Debt
The Case for Investing in Emerging-Market Debt
How to Evaluate Emerging-Market Debt
How to Invest in Emerging-Market Bonds
Emerging-Market Real Estate
The Case for Investing in Emerging-Market Real Estate
The Case Against Emerging-Market Real Estate
How to Invest in Emerging-Market Real Estate
Other Investment Opportunities
Chapter Eleven:
Investment Strategies and Specific Recommendations
General Investment Rules
Rule 1: Stay Cool
Rule 2: Diversify Broadly
Rule 3: Check Out Investment Bargains
Rule 4: Buy and Hold
Creating an Age-appropriate Portfolio
A Final Word
Part III Highlights
References
Acknowledgments

Editorial Reviews

Katia Hetter U.S. News & World Report One of the best books out.

Mark Mobius author of The Investor's Guide to Emerging Markets Global Bargain Hunting is an excellent guide for emerging market investors. The authors' extensive knowledge of financial history and their ability to explain it vividly give readers useful insights into the risks and opportunities arising from current developments.

From the Publisher

In a simple and straightforward manner, Malkiel, author of A Random Walk Down Wall Street, and Mei, an economics professor at New York University, explain how to invest in emerging marketsthat is, in firms based in countries where the per capita income is less than $9000 a year. The authors make a compelling case for taking advantage of the "extraordinary opportunities" afforded by such firmstheir home economies are growing, their work forces are becoming better educated and modern technology levels the playing field. Malkiel and Mei also suggest how to hedge your bets when investing in such high-risk markets: e.g., limit those stocks to 30% of your total portfolio and rely on professional managers and index funds where possible. And although they recommend against it, the authors even explain how to construct an emerging-market portfolio. Illustrations. (Jan.)

Publishers Weekly - Publisher's Weekly