The biggest concern that I hear from investors about emerging markets is they pose too much risk. But the fact is, in the markets, many supposedly safe stocks (and markets) that attract conservative investors actually pose more risk than believed.
Today, I point to two of America’s bluest blue chips—Kraft Heinz (KHC) and FedEx (FDX)—both of which likely qualified as safe stocks not too long ago.
These are truly great companies, no one is arguing that. But both stocks have nevertheless faced steep declines in their share prices as the companies have warned about slowing growth. Kraft Heinz has gone from 80 a share to the low 40s and FedEx has lost a shocking $100 per share in the last year to trade at around 165!
Fundamentally, for Kraft Heinz, the culprit is slower growth and a stronger U.S. dollar that has hit overseas earnings. For FedEx, it is fear of a challenge by Amazon (AMZN) and weaker growth in Asia and Europe. And these are just two among many safe stocks that have hit the skids not just during the sharp downturn in the fourth quarter but going back months before!
My point here is threefold. First, risk and volatility are part and parcel of investing in general—not just emerging markets, and not just growth stocks. Second, managing that risk by diversification—in part by having exposure to international markets—is important.
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And third, using Cabot’s market timing indicators, it’s a good idea to keep some cash on the sideline during down times to allow you to take advantage of turbulent markets that put opportunities on sale. For long-term investors, both FedEx and Kraft Heinz are probably solid ideas, though odds favor both stocks need bottoming processes before getting going.
Safe Stocks Surfacing in Emerging Markets
That is exactly what I’m seeing in emerging markets, which have been out of favor for months, with Chinese stocks in particular getting hit (the Shanghai Composite Index lost 25% in 2018).
This pullback has resulted in a bushel of Chinese stocks that have begun what I call “value bounces” in early 2019. There are many enticing names in this category, though of course I’m looking for the best of the best to recommend.
One example of a “value bounce” idea is iQIYI, Inc. (IQ), the subsidiary of Baidu (BIDU) that we owned for part of last year. IQ provides online entertainment services and operates a platform that provides a collection of Internet video content. Its share price went from around 40 a share in June 2018 to just $15 in late 2018. Since then, like many other Chinese stocks, it has begun an uptrend, rising to 19.
Turning to the bigger picture, there remains a great degree of uncertainty about the Chinese economic growth and debt issues as well as the ongoing U.S.-China trade negotiations. My guess is that there will eventually be some sort of positive development and a photo op with smiling faces. But trade, economic, and political tension between the U.S. and China will be a backdrop for both markets for a long time, though that tension is unlikely to be as intense as it has been in recent months.
We’re not big on predictions, but given the big decline and now our new buy signal from the Emerging Markets Timer, now’s a good time to start putting money to work, slowly building positions in some high-potential names.
And I just added two new names to the portfolio in my Cabot Global Stocks Explorer advisory. They’re not necessarily safe stocks—emerging market stocks rarely are. But like iQIYI, they’re value bounces—stocks that were oversold and can now be had at incredibly depressed values.
To learn the names of these two stocks, click here!
*Note: This post was excerpted from the January 10, 2019 issue of Cabot Emerging Markets Investor.
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