Today’s topic is emerging market stocks, developing markets stocks and frontier markets stocks.
What’s the difference?
It depends on who you ask. There is no universally accepted definition.
In general, an emerging market is one that is close to becoming a developed one—the developed ones being all of the major European countries, plus the U.S., Canada, Japan, Australia and New Zealand.
The attraction of emerging markets investing is this: while the U.S. GDP is growing at a rate of about 2.0%, emerging market economies tend to grow faster, and are thus fertile ground for fast-growing companies and investments.
India, for example, boasts a 7.3% growth rate, China 6.9% (if you can trust the numbers), Vietnam 6.5%, Panama 6.0% and Turkey 3.0%
The label “developing markets” is generally synonymous with emerging markets, though there is a slightly less positive connotation to it—though not as negative as the obsolete term “Less Developed Countries.”
And speaking of obsolete, the World Bank recently announced that in the 2016 edition of its World Development Indicators, it will no longer distinguish between “developed” countries and “developing” ones in the presentation of its data!
There appear to be two reasons for this.
Reason one is that the dividing line between developed countries and developing countries has grown muddy.
Developing countries used to be easy to recognize. They were characterized by high birth rates, large families, high infant mortality, illiteracy, food scarcity and, of course, low income.
But in recent decades, they’ve come a long way, particularly economically.
In short, in recent decades, pretty much everyone in the world has enjoyed great income growth—except the middle class in developed economies!
Today it’s the middle-class steel workers and coal miners in the U.S. who need help. But the World Bank doesn’t care about them.
Reason two for the change seems to be that the World Bank has suddenly been afflicted with a need to be so politically correct that it ceases discriminating—even when discrimination is useful.
From the World Bank’s perspective, any label that classifies countries by relative economic value risks stigmatizing those who are not among the leaders. Removing the labels “solves” the problem. (It reminds me of Lake Wobegon, where all the children are above average.)
Still, from our perspective as investors—particularly if we want to seek out those fastest-growing economies—labels can still be useful. Discrimination, in a positive way, can still add value.
For example, just a few years ago, the BRIC countries (Brazil, Russia, India and China) were the darlings of international investment circles, mainly because they were the four largest economies not quite in the developed club.
BRIC Stocks and More
The BRIC label was quite valuable back then.
But today, Brazil’s economy is on the skids and its government is falling apart, and Russia’s leadership has repeatedly demonstrated that it is unwilling to play fair on the world stage; both the invasion of Ukraine and the Olympic doping scandal provide a true picture of the values of Russia’s leaders.
If you look beyond BRIC, however, you’ll find no shortage of acronyms that will guide you to fertile ground for emerging market stocks, including these:
BRICET (BRIC + Eastern Europe and Turkey)
BRICS
(BRIC + South Africa)
BRICM
(BRIC + Mexico)
MINT
(Mexico, Indonesia, Nigeria and Turkey)
Next Eleven
(Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam) and
CIVETS
(Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa)
The original civet is a small, mostly nocturnal mammal (three to 10 pounds) that lives primarily in South and Southeast Asia, Madagascar and sub-Saharan Africa. Here’s a real civet.
The civet is probably not a good investment, but many of the stocks in that alphabet soup of acronyms are.
So, how can we use this knowledge to make intelligent investments?
One Great Undiscovered Bank Stock
Ten years ago, when Chinese stocks were much feared as an investment, we launched Cabot Emerging Market Investor and brought thousands of investors great profits in stocks like Baidu, Ctrip, Dr. Reddy’s Labs, NetEase, JD.com, Vipshop Holdings, QiHoo Technology, Sina.com. TAL Education Group, New Oriental Education, 58.com and Weibo.
More recently—as Chinese stocks have cooled—our international expert, Paul Goodwin, has been finding good values in Mexican airlines, Taiwanese chip companies and South American banks (not Brazil—it’s still getting worse there).
But when I think of places where people are afraid to invest, places with ample liquidity, and places where there are stocks that simply ignored by the average investor, one place stands above all others.
But the emerging market stock I want to highlight today is far less risky.
It’s a bank.
Furthermore, it’s a bank in a country that’s represented in none of those cute acronyms above, a country that’s usually overlooked by most investors.
Hint: it’s from a country that borders Brazil
And business is great!
Earnings at the bank are expected grow 7% this year and 15% next year.
The stock’s P/E ratio is just 12.
And it pays a 1.7% dividend.
Altogether, I think it’s a great opportunity to benefit from Brazil’s troubles. As money flows out of Brazil, some of it is making its way to this country.
Here’s a chart.
Now, I could tell you the name of the stock, and you could run out and buy it now. But then you’d be on your own, and I think you deserve more. I think you deserve regular advice on investing in emerging markets from the man who originally discovered this stock, our own Paul Goodwin.
If you had been a reader of Paul’s back on March 11, when he first recommended this stock, you’d already have a profit of 9%. That’s not bad for ten weeks, especially when you consider that over the same period, the S&P 500 has gained just 1%!
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