"Motorcycle" Markets

06/16/2014 10:00 am EST

Focus: ETFs

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

International investing specialist Carl Delfeld, editor of Capital Gains, sees upside potential in emerging and frontier markets; here, he discusses his outlook and some favorite ways to play this trend.

Steven Halpern: Joining us today is global investing expert Carl Delfeld, editor of Capital Gains. How are you doing today, Carl?

Carl Delfeld: Hello Steven, nice to be with you.

Steven Halpern: Emerging markets have been out of favor for much of the past year and have just recently begun to attract attention. What accounts for this previous underperformance and do you think these markets are now offering a potential opportunity?

Carl Delfeld: Well, Steven, you know, emerging markets come in and out of favor, and you're right, over the last year there's been very little media attention to them. Part of the problem was that the big countries, Brazil, Russian, India, China have really underperformed and people lost a little patience with them.

But I think things are turning. Last month, for the first time, there was sharp inflows into emerging market mutual funds and some of these countries are bouncing back nicely.

Steven Halpern: Within the broader context of emerging markets, you're particularly optimistic on the outlook for what you call frontier markets. Can you explain a little about this subsector of the emerging markets' world?

Carl Delfeld: Sure. Now, emerging markets are the so-called developing markets, and, just to give you an idea how they've done this year, India's up 16%, Indonesia 18%, Brazil up 16%, and, of course, Russia, which has been in the news, has bounced back 14% in the last month.

But then the next level-you might think of it as going out further on the risk/rewards spectrum-are these other countries called frontier markets.

Now, some of these, for example, Argentina is one; Sri Lanka is another; Burma, or Myanmar, is another, and these are even further behind countries like South Korea, Japan, and even China, Thailand, and so they have, it's like an elastic band.

They have even further to go to catch up to these countries, and the demographics are terrific. The growth levels are very high, and they're up 20% this year, and hardly anybody's talking about them.

Steven Halpern: In your latest research report, you refer to these frontier markets as motorcycle markets. Could you explain that?

Carl Delfeld: Sure. Well, the definition of an emerging market, or a frontier market, you know, the economists will get all sort of statistics together, but I prefer to keep it a little simpler. Some people use, if a country has a McDonald's, then it's an emerging market. If it doesn't, it's a frontier market.

But I really prefer the motorcycle, because if you visit, and I know you've been out there recently this year, if you go to these frontier markets, it's so clear that there are many, many more motorcycles on the roads than cars. That's a sign of both growth and opportunity, and that's why I refer to them as motorcycle markets.

Steven Halpern: You also noted that these markets often run on momentum rather than just on their fundamentals. Can you explain that?

Carl Delfeld: Sure. Well, you know, here in the US, if you turn on any CNBC, or go anywhere, there're a lot of analysts and gurus talking about the price to earnings ratios, price to book, and all these statistics, and that's kind of the way we do our markets, but in these countries, really, it's momentum.


In other words, if the stock market is moving, people jump on board, and they don't worry too much about analysis of the company's balance sheet, and so on and so forth, and so, these markets tend to move quickly and sharply, and a bull market can last a long time until the momentum shifts the other way.

Steven Halpern: You've hinted at the reward potential in these frontier markets, but could you also touch on the risk factors an investor should consider?

Carl Delfeld: Sure, sure. In general, they tend to be a little bit more volatile, which is good and bad, so I almost always recommend that, when you invest in a fund, or a particular company in frontier markets, that you have a trailing stop loss. Meaning, if it pulls back say 15%, 20% from its high, you automatically get out of that position to reassess the situation.

That's one thing, and then the other thing is, of course, is not to go overboard, so decide how much risk you can take, but I really think that emerging markets, frontier markets should be a pretty good, a nice chunk of your growth portfolio.

Steven Halpern: Now, for investors seeking exposure to these markets, you've been a fan of ETFs as a way to avoid the higher risk involved in selecting individual stocks. Is there a favorite ETF that stands out to you that our listeners should consider?

Carl Delfeld: Yes. I think the one I like the best-the one that's the most popular is the iShares Emerging Markets ETF (EEM). But I greatly prefer the WisdomTree Emerging Markets ETF (DEM), which is a basket of companies, some of the same companies that are in the other ETF, but they're weighted by dividend.

Number one, you get a higher dividend rate out of that ETF, but two, you get a more conservative basket of stocks.

Steven Halpern: And that would be a play on frontier markets as well as, generally, the emerging markets?

Carl Delfeld: Yeah, that would be a mix.

Steven Halpern: Before I let you go, is there also a stock that you could suggest that might be a indirect play on growth in these markets?

Carl Delfeld: Sure. You know, one that I'm tracking and about to recommend to my subscribers is Avon Products (AVP). Now Avon, like Mary Kay, everybody knows the name. You know, the marketers that go door-to-door selling women's perfume and all sorts of cosmetic products.

Avon Products is very similar to a lot of multinationals. In the US and North America, they're kind of having growth problems, but where they're really growing quickly is in the emerging and frontier markets.

In fact, it might surprise you that Avon Products; almost 60% of their revenue comes from emerging and frontier markets, where, you know, the door-to-door selling and people looking for opportunities to make a little bit of extra cash is very strong, and this stock, Avon Products, is down sharply from its one-year high.

It was up almost $25. Now it's $14.73 today, so I would be a buyer as a deep value play, and I think this stock's going to come back or become an acquisition target.

Steven Halpern: Well, we really appreciate you taking the time today. Thanks for joining us.

Carl Delfeld: Thank you.

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