For all the attention paid to the so-called BRICS, only a couple have real potential. It's time to cast a broader net and come up with several stock plays in markets that are just now emerging, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Something not so funny has happened on the road to the future. The five overseas markets that were supposed to pave that road have crumbled, by and large, and some of them have even turned into potholes.
Oddly enough, the emerging markets that look like the best road now to future profits are much, much smaller than those BRICS—Brazil, Russia, India, China, and South Africa—and don't even register in many investors' portfolios.
And on the evidence, they should. Most of us should own more stocks from Chile, Colombia, and Mexico, from Turkey, the Philippines, and Singapore, and from Nigeria and Kenya than we do.
It's not easy—I spend my days looking for great companies to buy in those markets for my mutual fund, Jubak Global Equity (JUBAX), and I can tell you it's a hard search. But it is possible.
And I think that search is crucial to building a portfolio for the emerging emerging-markets world. So today, I'm going to share a few.
Beating the BRICS
There's nothing especially wrong with the BRICS markets—except that in the cases of Russia, India, and South Africa, those economies have developed deep, deep problems. And across the BRICS group, many of the biggest plays on these emerging markets have underperformed smaller peers.
Drum roll: some numbers, please. Established BRICS in 2012, through November 7: iShares MSCI Brazil Index (EWZ), up 5.12%; iShares MSCI Russia Capped Index (ERUS), up 5.83%; iShares MSCI China Index (MCHI), up 6.58%; and iShares MSCI South Africa Index (EZA), up 9.22%.
Not bad, you say? I'd agree. Although the S&P 500 is up 16.43% year to date.
Now, the emerging emerging markets for the same period: iShares MSCI Turkey Investable Market Index (TUR), up 50.22%; iShares MSCI Chile Investable Market Index (ECH), up 8.21% to date; Mexico Bolsa (not traded in the US), up 10.61%; iShares MSCI Singapore Index (EWS), up 25.24%; and iShares MSCI Philippines Investable Index (EPHE), up 36.07%.
What intrigues me about these emerging emerging markets, even after some of them have had this run, is that the fundamentals driving these stocks are by no means exhausted.
Besides the usual developing-economy story—above-global-average growth in gross domestic product leads to rising incomes, which leads to rising demand for everything from chickens to appliances to education—the markets I've flagged are getting the benefit of sounder-than-average monetary and economic policies that are moving these countries up the credit quality scale:
- Turkey, for example, just got a debt upgrade from Fitch Ratings. This moved the country up to investment grade for the first time in almost 20 years
- This fall, Moody's Investors Service began talking about raising Mexico's credit rating to A3 from Baa1. Moody's last upgraded Mexico in 2005.
- Moody's and Standard & Poor's both raised Colombia's credit rating to investment grade in 2011, and in August upgraded Colombia from stable to positive, a sign that the country could get another upgrade in 2013.
- Standard & Poor's raised its rating on the Philippines to BB+, one step below investment grade in August, and in October, Moody's moved the country to Ba1, also one rung below investment grade.
With many of these emerging emerging markets just now making the transition to investment grade, there's still plenty of room for future improvement.
Why do you care about this trend? A higher credit rating allows a country to borrow money at a lower interest rate, and that stimulates the domestic economy. Expanding or starting a business gets cheaper. Financing a new home gets cheaper.
And the contrast with what's happening in the world's largest economies is catching investors' attention. At a time when the United States, Japan, and much of Europe are facing downgrades, these emerging emerging market economies are looking like better risks.
Selling at Home
Of course, these economies still exist in the same world as China, the United States, and other big global economic powers. A slowdown in the Chinese or US economy hurts the export sectors in these economies.
But even then, so robust is domestic growth that these countries stand a better chance of coming through with decent growth. That's especially true because healthy fiscal and monetary policies give these governments some room to run countercyclical economic policies—they can stimulate their economies when they slow.
What I've been looking for over the past year or so, then, are solid, domestically-oriented companies with a strong consumer bias. I'm certainly not averse to a company that combines those qualities with an export business as long as the company has found a way to diversify its sales to make up for any slowdown in the world's big developed economies.
|pagebreak|Buying In
I've got a few suggestions for you to research and add to your portfolios.
When do you want to buy? I'd suggest dollar-cost averaging into these stocks. While they are long-term picks, these stocks have enough volatility that you'd like to buy more when the price is low and less when the price is high.
My favorites in Turkey include: Anadolu Efes Biracilik Ve Malt Sanayi (AEBZY), a producer of beer and a bottler of Coca-Cola that sells in a market that stretches from Russia and Eastern Europe through the Middle East; and Arcelik (ACKAY), which sells its refrigerators, washing machines, cooking appliances, and vacuum cleaners in more than 100 countries, and is the third-largest appliance-maker in Europe.
In Mexico, I like Grupo Televisa (TV), the second-largest media conglomerate in Latin America and provider of an increasing amount of Spanish-language content in the United States through its relationship with Univision; and Industrias Bachoco (IBA), the country's largest poultry producer.
In Chile, I'd go with CorpBanca (BCA), Chile's fifth-largest bank and a major beneficiary of the pullback of Spanish banks in Latin America—CorpBanca bought Banco Santander's (SAN) Colombian unit in December 2011; and LatAm Airlines (LFL), the dominant airline in Latin America.
But don't forget the BRICS
Does this mean that I'd recommend ignoring the BRICS right now? Not entirely, but I would concentrate on the two most promising BRICS and leave Russia, South Africa, and India underrepresented in my portfolio until these countries work through their current near-crisis economic problems.
In Brazil and China, for long-term bets I'd concentrate on domestic companies, rather than exporters (good for short-term rallies, in my opinion) because they are best positioned to take advantage of the huge and expanding consumer markets in those two countries. In China, that means companies such as Internet giant Tencent (TCEHY) and insurer Ping An (PNGAY).
Right now, I find Brazil more interesting from a long-term perspective than China. Maybe China's new leadership will tackle the huge problems of corruption, a lack of an effective legal system for property rights, and an absence of any effective check on state economic power, but I have my doubts.
Changes in those areas are necessary if China's economy is to take the next step of development. Without them, I think China risks getting trapped in a global role of a manufacturer—perhaps an increasingly advanced manufacturer—of goods for companies from other economies. Brazil seems—and I stress "seems"—to recognize this challenge, and to be making an effort to differentiate itself from its big BRICS trading partner and competitor.
Not only does the administration of President Dilma Rousseff seem intent on breaking Brazil's long history of double-digit interest rates, but it also seems determined to at least start tackling Brazil's deep-seated tradition of the rich and powerful flouting the law. (I don't mean that flouting the law doesn't happen everywhere. It's just a matter of degree, and degree is important.)
In the current Banco Cruzeiro do Sul fraud trial, for example, the police are actually investigating the former owners of the midsized bank. Two of the accused are in jail without bail—not exactly common in trials of the connected in Brazil. This comes after the Supreme Court has convicted some of the country's most senior former politicians of corruption and vote buying.
The two cases have led some in Brazil to believe that the culture is changing. If so, that would be a big deal for Brazil and its journey to join the ranks of the world's developed economies.
My favorites in Brazil are private education companies Kroton Educacional (KROT11.BZ in São Paulo) and Anhanguera Educacional (AEDU3.BZ); and Natura Cosmeticos (NATU3.BZ ), Latin America's largest cosmetics company.
Many of the stocks I have mentioned don't trade in New York, or don't trade in volumes that make exits and entrances cheap or easy. I think that's partly a reflection of a world where national companies in emerging economies are more comfortable and more able to raise money in local financial markets.
US-based brokers, in response, are increasingly offering their account holders the power to trade in local markets. Charles Schwab (SCHW), for example, just added trading in a dozen local markets to its list of services.
These days, if you see a stock you like, it never hurts to ask if you can buy it in its local market.
