Investors hear a lot about emerging markets. The term is used to describe countries with a greater growth trajectory than established economies such as the United States. Emerging markets collectively harbor an estimated 85% of the global population and half of global gross domestic product (GDP), but companies in such markets account for less than 15% of the value of global stock exchanges.
It seems like an obvious opportunity, but investors might have a lot of questions. Developing countries don't always have favorable demographics, rights to property, laws protecting businesses, or other freedoms investors take for granted when it comes to American companies. How do investors sift through a noisy internet to determine what emerging markets are worth having exposure to?
Perth Tolle has developed a framework for doing exactly that. She manages the Freedom 100 Emerging Markets ETF (the ticker is $FRDM) that only invests in companies from developing countries that rank highly on an objective, independent measure of economic and personal freedoms. Countries are ranked relative to peers, not on their potential for improvement, and investments are weighted based on the country rankings. For example, Taiwan and Chile are included, but China and Russia are not.
The exclusion of Chinese companies is noteworthy considering many emerging market funds are heavily weighted to the country. However, as 7investing Lead Advisor Matthew Cochrane points out, investing in Chinese stocks has led to more disappointment than wealth-building returns in recent decades.
From 1994 to present, China's GDP has grown 2,750% while the average value of China's stock market has grown just 98%. How is that possible? There's a strong argument to be made that the inability of Chinese stock exchanges to capture economic growth is directly related to a lack of economic and personal freedoms. Unfortunately, the country has been recently backsliding in the relative rankings relied on by Perth and the Freedom 100 Emerging Markets ETF.
If you've ever been curious about responsibly investing in emerging markets but didn't know where to start, then this podcast is for you.
Publicly-traded companies mentioned or alluded to in this podcast include Alphabet, Apple, Didi, Meta Platforms (Facebook), Microsoft, Taiwan Semiconductor Manufacturing Company, and Tesla.
7investing Lead Advisor Matt Cochrane owns shares in Meta Platforms, Microsoft, and Taiwan Semiconductor Manufacturing Company. 7investing Lead Advisor Maxx Chatsko has no position in any companies mentioned on this podcast.
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