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Hidden in Plain Sight: Emerging Markets Are an Ignored Bargain

Emerging markets are re-emerging. But they get scant attention in the financial press. That’s good news for bargain hunters who are spooked by the volatility of U.S. stock markets.

After a two-year slump, equities in developing countries rebounded in 2017. This momentum is poised to continue in 2018.

Emerging market stocks have passed in and out of vogue over the past two decades. Investors have fluctuated from unbridled enthusiasm about their growth prospects to intense hand-wringing about their riskiness.

Now, emerging markets are back… for real. And yet, they’re relatively cheap. Developing markets have underperformed developed countries over the last three years. They still trade at a discount in terms of such valuation metrics as price-to-earnings, price-to-sales, and price-to-book value.

Wall Street’s swan dives on February 2 and 5 should prompt you to look beyond these shores for defensive growth. Emerging markets are hiding in plain sight.

All cylinders are firing…

Global growth in 2017 was “synchronized,” which means the pace has been roughly equal in all regions. This marks the first time that expansion has spread evenly around the world since 2010.

Tailwinds for emerging markets include population growth, higher education levels, greater technological savvy, and the expansion of a free-spending consumer class that skews toward a younger demographic.

China has resumed its role as global growth engine, assuaging anxieties that it would start to sputter. The annual gross domestic product (GDP) growth rate in the world’s second-largest economy is coming in at about 6%, supported by continued policy stimulus.

Taiwan and South Korea are expanding. With export-dependent economies oriented toward electronics and high technology, these two countries are positioned for sustained growth.

Indeed, all of the Asian tigers have regained their roar. Even Japan is off the ropes, thanks to the stimulus of “Abenomics.” Commodity and energy prices are rising and these export nations are breaking trade records.

Latin America is resurgent as well. Stretching from the northern border of Mexico to the southern tip of South America, Latin America is home to more than 630 million people. The region snapped back in 2017 from a dismal 2016, with growth accelerating in 2018. Depressed stocks in the region are a good buy now.

Emblematic of the region’s resurgence is Mexico. If you’re worried that President Trump’s bellicose rhetoric toward Mexico will dampen that country’s prospects, don’t be.

You don’t hear much about Mexico’s growing economic power in the mainstream media. Cable news is preoccupied with immigration and The Wall. However, Mexico’s export-driven economy is thriving.

Mexico is the world’s fourth-largest auto exporter. Surprised? It’s also the eighth-largest producer of oil. Mexico manufactures and exports the same amount of goods as the rest of Latin America combined.

Mexico boasts an ascendant middle class. It’s true, more and more Mexicans are crossing the border… but it’s to leave the U.S. That’s another big trend the media doesn’t cover.

Mexico, Brazil and Argentina enjoy plentiful natural resources, a highly literate population, a diversified manufacturing base, and an abundant agricultural export market.

The there’s India. The “Jewel in the Crown” is a major destination for information technology outsourcing. The country’s factories are humming. Its IT firms are hubs of innovation.

To be sure, there still are reasons to worry about these regions.

President Trump’s “America First” policies could trigger a destructive trade war with emerging markets. Oil and commodity prices could swoon again. U.S. stock markets remain vulnerable to another steep decline; they could take international indices down with them.

Rising military tensions throughout the Pacific Rim could worsen. Emerging economies with large debt could stumble if their balance sheets become unsustainable.

Nonetheless, the breadth of economic growth in emerging countries makes their equities a little-noticed value.

The time to invest in emerging markets is now, before irrational exuberance about their prospects takes hold again and their stocks begin trading at a premium.

Letters to the Editor

“Should I worry about inflation?” — Jack H.

In a word, yes. Inflation is running below a meager 2% and has been extremely low for years, prompting investors to forget how inflation can ravage their financial security.

As the U.S. economy reaches full employment, job creation slows. The number to watch is wage growth.

The Labor Department recently reported that average hourly earnings rose 9 cents, or 0.3%, in December after a 0.1% increase in the previous month. That boosted the annual increase in wages to 2.5% from 2.4% in November. These numbers startled Wall Street and triggered the massive stock declines in recent weeks.

After years of stagnant wage growth, workers will finally start seeing bigger paychecks. But wage growth could spark inflation.

The $1.5 trillion tax cut could fuel inflation. The massive bill provides fiscal stimulus during an economic expansion. The U.S. economy could overheat. It’s not clear how corporations will spend that cash. We’ll advise you as inflation pressures develop.

Want to know more about inflation in 2018? Shoot me an email: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.


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