Emerging Markets Are the Best Stocks to Buy Before a Recession Hits
Investors are going to seek out more risk this year because U.S. economic growth is slowing down.
I know that sounds illogical.
But, barring a U.S. recession, it’s not.
Last week, I discussed the notion that U.S. outperformance is coming to an end.
It’s called “Peak U.S.”
And it’s full of opportunity … just not here at home.
The U.S. stock market is losing its economic growth and interest rate advantages. That means there are better investments out there.
Last week, I suggested the iShares MSCI India exchange-traded fund (ETF). It’s one way to profit when investors favor emerging markets.
I discussed how Peak U.S. will look: “Investors will start to move their money elsewhere. This alone will even the odds and could even help the lagging economies, especially the emerging markets, find their stride again.”
That’s an important point. Moving investment capital into emerging markets helps those economies play catch-up.
When capital leaves the U.S., those economies grow faster. As the outlook improves, investors move more money into these economies. For traders, it’s the opposite of a vicious cycle. It’s what’s known as a virtuous cycle.
Pretty soon it starts to pay off.
And savvy investors will get paid multiples of what they can earn in the U.S. stock market.
Emerging Markets — Higher Risk, Higher Reward
In the 18 months before the last U.S. recession began in 2007, the SPDR S&P 500 ETF rose 25%. Not too shabby for an in-home investment.
But the iShares MSCI Emerging Market ETF (NYSE: EEM) rose a whopping 85% — it more than tripled the S&P 500 ETF in that time!
An investment in an emerging market is riskier than an investment in a developed market.
Growth in these economies can’t rely on liquidity — assets in cash — from their adolescent bond markets. Greater risk makes it costlier for businesses and consumers to borrow.
That’s why growth depends on capital flowing in from mature markets looking for better returns.
Currency fluctuations, natural resource prices and global growth expectations influence those capital flows.
And their influence is huge.
But let’s focus on the money…
This Weak Currency Is Important for Emerging Markets
The value of one country’s money is different from the value of another country’s money.
Imagine Thailand borrows $100 million.
Thailand pays back some of that loan each month.
Its currency is the baht.
If the U.S. dollar gets stronger relative to the Thai baht, Thailand will have to spend more bahts to repay its dollar-denominated loan each month.
But if the U.S. dollar gets weaker, Thailand will spend fewer bahts to pay its loan.
That’s a welcomed shift.
And it’s happening …
Investors are set to make a bunch of money because there’s a currency driving fresh capital into emerging markets … right now.
It’s the euro.
Eurozone economic growth sank after the global financial crisis in 2008 and the European sovereign debt crisis in 2010.
The European Central Bank slashed interest rates.
That’s why the euro lost 31% to the dollar since 2008, a massive move for a major currency.
The euro is still not a good investment.
But a weak euro is helping traders make investments that will pay off.
Investors are borrowing euros. They’re investing those euros in places that offer an attractive return.
And this is where emerging markets come in.
For the last eight years, the U.S. promised greater reward and less risk.
That’s set to change — be ready.
Once Peak U.S. makes its way into the narrative, emerging market investments will take off.
The iShares MSCI Emerging Markets ETF is an easy pick for U.S. investors.
It tracks an index of stocks from 24 emerging economies, and just like in 2007, it’ll trounce the broad U.S. stock market in the months ahead.
Senior Analyst, Banyan Hill Publishing