Emerging markets have been in the dumps since late 2010 as
investors have worried about inflation in countries such as
China. But the tide may be turning.
The first piece of evidence is simple price action: The iShares
MSCI Emerging Markets Index (
), a broad measure of the sector, has gained almost 5 percent in
the last two weeks while the S&P 500 has barely moved (purple
and blue lines on chart below, respectively). That marks a
complete reversal of the performance from mid-October through
And last Tuesday, as Pete wrote on InsideOptions, our Heat Seeker
system spotted a large bullish call spread that's positioning for
the fund to rally another 11 percent by April expiration.
We all know that stocks provide a great view into the future, so
we often see trends unfolding in the market before they're
corroborated in news stories. That appears to be the case with
emerging markets now. But I have a few more ideas about what's
--We're returning to a "weak dollar" trend similar to the
. Despite plenty of evidence that the economy is in recovery, the
Federal Reserve is committed to keeping interest rates near zero
percent. Meanwhile, other central bankers--including the
Europeans--have raised rates or seem willing to do so. Add to
that the breakout in oil prices, and things look terrible for the
--Emerging markets have been in a secular bull market
The basic factor driving that move is the huge income growth in
countries such as China, India, Brazil, Peru. You know, the whole
"emerging middle class" mantra. That trend is real, huge, and
still pretty reliable--especially because those countries are
doing a much better job than the United States at putting
citizens to work.
--The sector has been punished long enough.
Stocks in long-term booms can spend months or years consolidating
before resuming their uptrend. Look at names like Microsoft
between 1992 and 1994 and Cisco Systems between 1993 and 1995 for
similar examples of this pattern: They made giant moves then
stalled, but the fundamentals (in their case, the rise of tech)
remained in place. After a period of consolidation, the rallies
Getting back to the recent strength we've seen in emerging-market
stocks, one thing that caught my attention was the fact that
financials seem to be leading the gains. For example, Peru's
) is up 9 percent in the last two weeks, and Colombia's
) has climbed 11 percent. India's ICICI Bank (
) moved a little earlier before pulling back but is still up 8
percent in the last month.
These stocks have been in intermediate downtrends and are now
contending with resistance at their 50-day moving averages, so
investors should watch how they trade in the next few sessions.
Now is the the time to think about getting long. (Something I
plan to do.) Financials are good trades because they're a
relatively simple way to ride economic growth. More GDP means
more money moving around, more credit cards, more bank deposits,
and more loans. Another consideration is that most emerging
markets deleveraged between 1980 and 2000 at the same time their
populations grew. That means more people, but less debt--great
news for banks!
As a quick example, consider that BAP's loan book grew at 24
percent in the fourth quarter, more than twice the rate that the
economy expanded. IBN and the others are singing a similar tune.
(Yes, this will probably result in a U.S.-style debt crash at
some point down the road, but that is years or decades away.)
Two other names worth exploring include Brazilian heavyweights
Banco Itau (
) and Banco Bradesco (BBD). Some other emerging-market stocks
outside the financial sector that merit attention include Russia
as a whole using the Market Vectors Russia ETF (RSX), which Pete
has covered a lot, Russia's Mechel Steel (MTL), and Chinese
software company Longtop Financial Technologies, which has gotten
beaten down to long-term support despite reporting some terrific
numbers on Jan. 31.
Another name I like is China New Borun (BORN), a distillery
company that is inexpensive by any metric (forward earnings of
five times despite year-over-year net income growing 53 percent).
One more is AES, a U.S. company that owns utilities around the
world and recently saw some bullish call buying.
Once again, these are just some ideas and please do your own
research to be comfortable with your picks. The important thing
is that now is the time to start looking--not in three months
after they've rallied and everyone is talking about it.
I own BORN shares.
(A version of this article appeared in optionMONSTER's Open
Order newsletter of March 9.
Chart courtesy of tradeMONSTER.)