Today we’re taking a quick look at a teaser ad that went around late last week, for Cabot’s Emerging Markets Investor. That’s the letter that used to be called Cabot China & Emerging Markets Report, it’s changed names to reflect the relative lack of popularity of Chinese stock picking these days but is still edited by Paul Goodwin… and they’re selling subscriptions by promising to reveal their top emerging markets stocks, all of which they say are “headed toward 50% gains in the next 90 days.”
They’re not alone in that sentiment, we’ve seen plenty of other folks arguing that emerging markets are ready to recover now — and it’s not just that emerging markets tend to be more commodity-focused and have benefited from some early (and uncertain) recovery in a few commodities, though that’s still the case with many of them, it’s also that there are some reasonable valuations in these markets when you compare them to the relatively pricey US stock market.
Here’s their brief big-picture sum-up from the ad:
“Cash is flooding into emerging markets again—a whopping $10 billion in just the last five months!
“This represents not only a mammoth turnaround from the $103 billion that flowed out of emerging markets over the past two years, but also signals a huge opportunity in the making.
“Three events, in particular, are driving this new boom.
– Rising commodity prices, which drives growth in emerging nations,
– Rising foreign currencies, which increases profits and cash flow, and
– Value—emerging markets stocks are cheap by U.S. standards, selling for a P/E ratio of 11 compared to 17 for U.S. stocks.”
Those are pretty reasonable assessments, though the currency issue tends to be very company-specific and country-specific — exporters, for example, enjoy having an undervalued currency because they pay their employees and buy raw materials in their weak local currency but get to sell in stronger currencies… but certainly a stronger local currency (or a weaker US dollar, since that’s what most companies measure themselves against) can be a boon to many others.
And this is not a brand new trend — emerging markets investments in general have had a good twelve months of inflow, partly because of continuing low interest rates that tend to be good for emerging markets, where incoming capital flows and capital investment from other countries are important… and the emerging market indices are now just about equal to the S&P 500 when it comes to trailing twelve month performance (it’s not a coincidence that things look a little bit better now than they did a couple weeks ago — that’s because almost all markets had a big swoon in early August last year, at one point the emerging markets ETF EEM was down 12.5% in a few weeks… that and most of the rest of the 2015 swoon that had EEM down close to 20% last year has now rolled off the “trailing twelve months” chart).
That doesn’t make up for the huge exodus from emerging markets that we saw in the years prior, but the push of new money into emerging market equities over the last two months is starting to make a dent — and the push into emerging market bonds has been even more dramatic, thanks to the global thirst for yield and the (relatively) high coupons you’ll find on sovereign and corporate bonds in the emerging world.
“Emerging markets” encompasses a broad swath of economies and companies, many of which you wouldn’t really consider to be “emerging” — the largest holding in the biggest emerging markets ETF (EEM, the iShares emerging markets product) is Samsung, one of the largest and most dominant electronics manufacturing companies in the world… and fully 50% of EEM is allocated to China, South Korea and Taiwan, with a big IT focus. The other top holdings these days are Alibaba, Tencent, Taiwan Semiconductor and China Mobile… all megacap companies you probably know… traditionally it used to be that financial services, telecom providers (or, as we used to call them “phone companies”) and big energy or mining companies were the largest part of most “emerging” markets, but technology globalization ha