Tags: Bogle | emerging | market | risk

Bogle: Emerging Market Stocks 'Are Cheap for a Reason'

By    |   Thursday, 30 October 2014 01:32 PM

The MSCI Emerging Market stock index has dropped 5.7 percent in the last three months, so does that make emerging market stocks a buy?

No, says Jack Bogle, founder of the Vanguard Group.

"I think there is a lot of risk [in emerging markets]: capital risk, sovereign risk, economy risk, most of them are very export-dependent," he tells Morningstar. "So I think they are cheap for a reason. There is no such thing, as a free lunch, and I just don't think you need to do it."

That's not to say Bogle is adamantly opposed to investing in emerging markets.

"The international market is about 55 percent of the world's market cap, and of that 55 percent, let me guess that emerging markets are maybe 15 to 20 percent."

So if you decide to invest in emerging market stocks, how much of your portfolio should you allocate? "Maybe 10 percent," Bogle suggests.

If you opt for 20 percent, "and it does 2 percentage points a year better than the U.S., you've added 40 basis points to your performance. I don't think it's worth it," he notes.

"Everybody in America, everybody in the world, every intelligent academic, every hedge fund manager, the great Burton Malkiel, all tell me I am wrong, so you can listen to what the smartest people in this business think and get into emerging markets, or what not the smartest person thinks, who just tells you there is no reason to do it," Bogle adds. "But if you want to do 10 percent, I wouldn't stop you."

Meanwhile, the International Monetary Fund (IMF)'s reduction of its forecast for world economic growth earlier this month wasn't enough to make Mark Mobius, executive chairman of Templeton Emerging Markets Group, turn against the asset class.

The IMF lowered its estimate of 2014 global growth to 3.3 percent from a 3.7 percent forecast in April.

"It's important to remember that this is just one forecast, and it's also important to remember that not all emerging markets are the same," Mobius says in a commentary obtained by CNBC. "The IMF actually increased growth projections in some cases."

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The MSCI Emerging Market stock index has dropped 5.7 percent in the last three months, so does that make emerging market stocks a buy?
Bogle, emerging, market, risk
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2014-32-30
Thursday, 30 October 2014 01:32 PM
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