How to find good quality emerging market stocks

Finding cheap emerging market stocks is one thing, but how do you know if what you’ve found is any good? Cris Sholto Heaton explains how to hunt for quality stocks.

Any emerging-market fund manager you care to listen to will tell you that his sector is ideally suited to active fund management. Emerging markets are fast-changing and full of promise, but are also risky, volatile and inefficient in other words, available information about companies is often not priced into markets very rapidly. As a result, they say, a good active manager can beat the market while taking fewer risks far more easily in the emerging world than in the staid, well-researched developed markets.

It's a convincing theory. Sadly, the evidence doesn't support it. Fewer than 25% of emerging-market funds beat their index over the five years to the end of 2012, according to Standard & Poor's. The average emerging-markets investor would have been better off buying a cheap tracker fund, even though the average emerging-market index is itself far from perfect (they tend to be too heavily weighted to sectors such as financials and commodities, and full of state-owned or tycoon-controlled stocks with poor corporate governance).

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.