Threats surrounding developing economies have been recurrent talk in market circles over the last few years. Leaders of the financial world are continuing to discuss this theme on the sidelines of the World Economic Forum in Davos, as per reports.
The latest dark cloud on the horizon is the IMF's quarterly update to its World Economic Outlook. In the report, the IMF has reduced its 2016 growth forecast for developing and emerging economies. However, such economies have staved off multiple headwinds over the last three years. This means that it still makes good sense to invest in select stocks from these countries.
The IMF lowered its projections for developing and emerging economies to 4.3% for 2016. Last October, it had estimated that growth for this year would come in at 4.5%. However, this is still higher than the 4% rate experienced in 2015.
China's economic woes are at the root of the developing world's problems. The second-largest economy is a major consumer of a variety of materials. On the other hand, relatively smaller economies are part of its massive supply chain.
A major outcome of these troubles is the flight of capital from such economies. According to Washington-based Institute of International Finance, nearly $3 trillion had entered these markets during 2001-2011. This inflow of capital continued until last year, when nearly $735 billion flowed out. Structural issues related to their economies and large buildups of debt are other factors plaguing these countries.
Economies Showing Resilience
However, things may not be as tough as they seem. For instance, the debt burden of these countries has not been particularly dismal when considering historical standards. A study conducted by research firm Capital Economies last year concluded that it was the rate at which such debt continued to grow rather than the actual volume of debt which triggered crises.
Over the last few years, debt levels of most emerging economies have increased only marginally relative to their size, according to the company. For instance Malaysia's private debt-to-GDP ratio has increased by 18.5% over the last 10 years. During the crisis of 1997, this metric had increased by almost a 100 percentage points.
Additionally, most of such debt is held in local currency, reducing the impact of capital flight. Also, no key emerging economy has suffered a crisis despite large capital outflows over the last few years.
The key takeaway from various indicators is that it would be incorrect to lump together all developing economies and say that they are risky options. Several countries, such as, Mexico and Panama, are performing remarkably and deserve the interest of investors. A recent Reuters poll indicated that Mexico will be one of the leading performers among Latin American economies this year. Additionally, Panama's economy grew 6% last year and will possibly expand at the same rate in 2016 per World Bank estimates.
More importantly, companies located even within an economy which seems to be a risky proposition could still be great choices. Individual metrics could indicate which of them are winning propositions. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Sibanye Gold LimitedSBGL is a gold mining company based in South Africa.
Sibanye Gold has a Zacks Rank #2 (Buy) and projected growth for the current year is 78.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.78, lower than the industry average of 25.10. Its earnings estimate for the current year has improved 69.4% over the last 30 days.
Grupo Simec S.A.B. de C.V.SIM is a Mexico-based manufacturer of special bar quality steel and a broad range of steel products.
Grupo Simec has a Zacks Rank #2 and expected earnings growth of 54.4% for the current year. It has a P/E (F1) of 9.05, lower than the industry average of 11.67. Its earnings estimate for the current year has improved 7.8% over the last 30 days.
Empresa Nacional de Electricidad S.A.EOC , also known as Endesa Chile, generates, distributes and sells electric energy in Chile, Peru, Brazil, Colombia and Argentina.
Endesa has a Zacks Rank #2 and its projected growth for the current year is 22.1%. It has a P/E (F1) of 13.63, lower than the industry average of 15.91. It has a PEG ratio of 1.32, lower than the industry average of 2.98.
Avianca Holdings S.A.AVH is a Panama-based owner and operator of airlines services.
Avianca Holdings has a Zacks Rank #2 and expected earnings growth of 43.8% for the current year. It has a P/E (F1) of 2.48, lower than the industry average of 12.47.
Himax Technologies, Inc.HIMX is a Taiwan-based provider of fabless semiconductors solutions.
Himax Technologies has a Zacks Rank #2 and its estimated growth for the current year is 40.3%. Its earnings estimate for the current year has improved 5.9% over the last 30 days.
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