I love it when perception differs from reality... that's when
you can really make money in the stock market.
Take emerging markets for instance.
If you read the news regularly, you'd think emerging markets
were the last place you'd want to put your money. Almost every
day there's a headline decrying how the economies in these
developing nations are on the verge of collapse. In 2010 it was
Greece... in 2012 Egypt... last year it was Syria... and today
The problem with following all this bad news is that sometimes
it leads us to miss out on the good things... like how stocks in
India and South Africa recently touched new 12-month highs or how
Irish companies rebounded 45.6% in 2013.
Unfortunately, most investors didn't see a dime in profits
from these incredible rallies. They succumbed to the headlines,
avoided emerging markets and instead settled for the good, but
lower returns offered by U.S. stocks over the same period.
The good news is that the opportunity to earn explosive
profits from emerging markets is far from over. While India and
South Africa might be doing better, the rest of the world's
emerging markets have been absolutely crushed lately, and
conditions are ripe for incredible returns...
My colleague, Michael Vodicka, who writes our premium
, recently talked about this exact opportunity in an update to
his subscribers. Here's what Michael had to say:
[Emerging market] pessimism was on display early in the year
when many analysts were warning investors about weakness in
emerging markets, leading to large capital outflows from the
group. That's when I told readers of High-Yield International
that I was "Getting Ready to Pounce on Emerging Markets."
That message proved to be well timed, coming at the exact
dead low of the pullback, with iShares EEM jumping close to 15%
since. It was another example of Buffett's classic advice --
"be greedy when others are fearful and fearful when others are
Bigger picture, I believe this extended period of
consolidation in emerging markets is creating a big
opportunity. Not only is it a chance to buy emerging markets
stocks while they are out of favor and trading with multi-year
low valuations, in many cases it has also driven yield
expansion. Because while many emerging market stocks have been
trading sideways, many have also continued to raise their
This is a trend that I want all the readers of High-Yield
International to be aware of. There are never any certainties
in the market. But there is probability. And in the long run, I
believe emerging markets, and international markets in general,
have significantly more upside than the S&P 500.
One of the keys to making money in emerging markets is
realizing that they rely on momentum and sentiment as much as
they do fundamentals. Emerging-market stocks can sometimes fall
further than you might have imagined possible... and they can
soar to unexpected heights. Lately, pessimism has been rampant.
But as Mike referenced, with the
iShares MSCI Emerging Markets ETF (NYSE:
bouncing up off recent lows, we think sentiment is beginning to
We've seen this pattern play out over the last six weeks.
According to a research report by Jeffries, $6.5 billion worth of
investor capital has flowed into emerging-market funds (equity
and bond) since March. This stands in stark contrast to what we
saw in 2013, when emerging-market funds saw net capital outflows
in excess of $24 billion.
Why are people returning to emerging markets? The answer is
simple... they're one of the last places in the investment
universe that remain attractive given today's conditions.
Think about it. After the market's historic 30% rally in 2013,
U.S. stocks are now trading at ridiculously high valuations. The
price-to-earnings ratio for the S&P 500 currently sits at 20
-- significantly higher than its long term average of 15.5. To
make matters worse, growth stocks in the U.S. have started to
slow down. The Russell 2000 index -- an index that tracks some of
the fastest growing small caps in the United States -- has
retreated over 10% in the last few months.
With U.S. stocks trading at sky high valuations and momentum
plays cooling off, investors are starting look to emerging
markets as the next undervalued growth story. That's one reason
emerging-market stocks have been rallying lately. Since the
beginning of February, the iShares MSCI Emerging Markets ETF
) has surged 12% -- more than double the S&P 500's return
over the same period.
While the jury is still out as to whether the rally indicates
a long-term shift in emerging-market momentum, one thing is
clear: emerging markets are one of the last places you can find
cheap stocks today.
As it stands, the iShares MSCI Emerging Markets ETF trades at
a price-to-earnings ratio of 8. Some emerging market stocks are
even cheaper. For example, the MICEX (Russia's version of the
S&P 500) trades at a price-to-earnings ratio of 6.47.
If sentiment towards emerging markets really is starting to
take a turn for the better, then these record low valuations
should provide plenty of upside for investors going forward. But
even if it doesn't, and emerging-market stocks continue to remain
out of favor, those low valuations should limit the downside risk
for investors who buy emerging-market stocks today.
The question, of course, is which emerging-market stocks to
One of the principle fears investors have when investing in
emerging markets is political risk. Typically, these countries
are still trying to figure things out... getting their legs
underneath them and figuring out their priorities. And we think
state-owned behemoths (like Brazilian oil-giant Petrobras, China
Mobile and Russia's Gazprom, to name a few), are one of the
biggest risks investors take when investing in emerging markets.
These companies are typically bloated, inefficient operators that
more often than not serve the interest of government bureaucrats
than that of investors.
That's why we think investing in small-to-midsized companies
in emerging markets is far preferable. And while that may sound
like a risky proposition, as we'll explain in a moment, there's
an easy, safe way for investors to get exposure to the best
small-to-mid-cap companies in emerging markets all in one simple
The thing is smaller companies in emerging markets are more
focused on local growth trends. They're not concerned with having
to meet oil production quotas, for example, so that it can meet
budgetary shortfalls caused by the state. Their main concern is
meeting the demand of consumers -- things that directly
contribute to an emerging economy's growth. And because of their
relatively smaller size, they have plenty of room to run when
conditions are good.
There's one exchange-traded fund (
) we've found that we believe will benefit from the incredible
growth opportunities available from smaller companies in emerging
markets -- the
WisdomTree Emerging Markets SmallCap Dividend (NYSE:
This fund invests primarily in small-cap companies in emerging
markets, and rewards shareholders in the form of cash dividends.
DGS employs a more active approach in its search for small-cap
companies than other funds. On a yearly basis, it screens for
firms that have paid out at least $5 million in cash dividends in
the past 12 months as well meeting certain market-cap and
liquidity requirements. It also caps individual holdings at 5%,
and sectors and countries are capped at 25%, which makes sure we
aren't over allocated to one country or sector.
As with all investments, there is risk associated when
investing in emerging markets. But the composition of this fund
is one of the best ways we've found to invest in the long-term
potential of emerging markets. We also like the fact that it
currently yields 3.45%.
For those looking to get in on the emerging-markets trend, DGS
provides an excellent way to allocate a small portion of your
portfolio toward these developing countries
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