One of the best investing lessons I ever received was from an old retired trader.
I’ll call him “Big Bend George” because he lived way down in the Big Bend region of Texas, on the Mexican border.
He was a fan of my financial news program on PBS. He would call me every few weeks, and we’d do what all traders and investors do … dish about markets and stocks.
One of the points he always made can be summarized by five words…
Go where the growth is.
And these days that growth is in emerging markets, not the United States.
Case in point: What’s the fastest-growing index since the big late-year sell-off?
It’s the MSCI Emerging Markets Index.
The iShares MSCI Emerging Markets ETF (NYSE: EEM) outperformed the S&P 500 Index by more than 5%. It’s in positive territory, while the S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index remain in the red.
To paraphrase my buddy Big Bend George, where’s the growth these days?
It’s not in the U.S., where the economy is going to expand (at best) 2% a year. Economists have the U.S. gross domestic product (GDP) dwindling steadily lower, with forecast growth of 1.4% by 2023.
On the other hand, emerging-market economies are growing like crazy.
Quality Companies at a Cheap Price
India’s GDP exploded 7.3% in 2018. China’s grew 6.2%.
If that’s too far afield, look at what’s happening in Latin America.
The growth rate of the major economies in the region are pegged at a steady 3% or better — roughly twice as much as U.S. growth over the next few years.
The prospects are so good that Japan’s SoftBank recently created a $5 billion investment fund focused on the region’s rapidly developing digital and communications economy.
I have one Latin America-focused company in the Total Wealth Insider model portfolio that’s already up more than 20% just in the past six weeks or so, with a lot more to come.
Best of all, the valuations of publicly traded companies in those markets are at historic lows. Emerging markets like Brazil are about as cheap as I’ve seen them in many years.
If you use a popular measure of value, like the CAPE ratio (short for cyclically adjusted price to earnings) pioneered by economist Robert Shiller, the chart below shows how it stacks up.
If you’re looking for quality companies at a cheap price, the lower the number, the better:
As cheap as they are, is it any wonder that emerging-market stocks are starting to outperform those in the U.S.?
All the Right Factors
We’re still in the earliest stages of a bull market for emerging-market stocks. All the right factors are now coming into play.
At some point soon, the U.S. and China will resolve their trade impasse.
It almost doesn’t matter at this point what the supposed agreement looks like. The main thing is that the uncertainty is cleared up for the global investment community.
Likewise, Europe’s lingering Brexit nightmare is about to be resolved as well.
Again, it really doesn’t matter to the markets whether Britain “crashes out” of the EU or remains (though I think Britons will ultimately decide to remain). Resolving the matter — removing the uncertainty — is what matters most.
And lastly, we have the Federal Reserve.
Mindful of not overdoing it on interest rates, the Fed may well sit on the sidelines for far longer than many on Wall Street can imagine.
And the longer it stays there, the more time it gives emerging markets to get red-hot with growth … and swell the wallets of investors who get into these stocks now.
Jeff L. Yastine
Editor, Total Wealth Insider