Emerging Markets Offer Investing Opportunities

The economic development of China has been one of the biggest business stories of the 21st century.  With enormous reserves of cheap labor, a centralized government that can implement economic decisions quickly, and a real flair for capitalism, the country has become the factory for the world in an amazingly short time.  As a result, growth of China’s gross domestic product has topped 10% a year for more than a decade.

This runaway prosperity has brought many areas of China through the stages of development from agrarianism to industrialization in a matter of years rather than the decades it took the western world.  (It has also brought the ills of industrialization in record time, including pollution, dislocation, urban sprawl and traffic congestion, but that’s another topic).

And now, in a huge economic irony (and sooner than anyone would have expected), China’s prosperity is leading to the migration of jobs to lower-wage countries!

Changes in China

The astonishing migration of global factories to China has led to increasing competition for workers, which, as every economist knows, leads to higher wages.  Villages have been emptied of young workers heading for factory jobs, inflation has appeared as wages rise and pressure to allow the yuan to rise has been constant.  All of these factors have sent labor costs soaring at 25% a year. 

Now that manufacturers know how easy it is to set up new factories, they’re quicker than ever to up stakes and leave town in search of lower costs.  The hot new market of the moment appears to be Vietnam, which is presenting a package of tax breaks and lower wage demands, but if the pattern holds, in a few years it will be Cambodia or some other less-developed nation.

The Chinese government–in a perfect practical demonstration of how hard it is to substitute planning for the actions of free market forces–is working to slow the influx of foreign capital, dampen inflation and temper pollution.  All of this moderating action has sent the Shanghai Stock Exchange down more than 50% this year; investors are pretty cold-hearted when it comes to their money.  They don’t have a lot of sympathy for the trials and challenges of managing an unmanageable economy with the Olympics approaching and the eyes of the world taking in every detail.

I’m glad that my only job is to pick through the winners and losers among the emerging market American Depositary Receipts–or ADRs–that trade on U.S. exchanges.  Shifting the portfolio of the Cabot China & Emerging Markets Report away from China has been easy.

And when those Vietnamese stocks start to show up on U.S. exchanges, I’ll be all over them.

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As the second most-populous country on earth (around 1.1 billion people), India has a special place in the group of rapidly developing countries known as the emerging markets.  Investors have always found the country’s representative democracy, low labor costs, educated work force and well-developed legal system attractive.  No wonder the equities from the Big Four emerging countries are called BRIC stocks (for Brazil, Russia, India and China).

But for investors outside India, finding ways to gain exposure to this dynamic giant hasn’t been easy.  For many years, the Indian government restricted ownership of Indian stocks to domestic investors. 

Cabot China & Emerging Markets Report recommends only Indian stocks that trade on U.S. exchanges as ADRs; these are U.S. dollar-denominated equivalents of foreign stocks that are issued by a sponsoring bank.  ADRs give investors the exposure to foreign companies they want without currency risk or extra brokerage fees. 

Unfortunately, the universe of Indian ADRs numbers well below 20, limiting the choices for investors who don’t want to leave the comfort of the dollar, no matter how it’s doing against other global currencies.

The easiest way to get a little India is to buy an Indian mutual fund that invests in a bundle of Indian stocks.  The downside of this is that the customary risk-aversion of mutual funds will spread your investment across so many of the stocks in the benchmark index that the success of any one or two of them will give only the smallest of boosts to your portfolio.  Also, mutual funds are often required by their investment guidelines to remain close to fully invested, so when a market heads south, your investment heads south right along with it.

Applying Cabot’s Method to India

We at Cabot have always looked longingly at the nearly 5,000 stocks listed on the Bombay and National Stock Exchanges.  The BSE has a market cap of around $1.8 trillion, making it the 10th largest in the world.  Indian investors are knowledgeable and enthusiastic, and fast-growing Indian companies would be ideal subjects for Cabot’s growth investing disciplines.

While Western investors are pretty much out of luck as far as buying native Indian shares, Cabot has recently gained access to a new database of information about these stocks.  This new database is allowing us to satisfy our curiosity about the effectiveness of our growth investing techniques in a non-U.S. market.  We recently created a Special Issue of the Cabot China & Emerging Markets Report picking promising Indian stocks, and I’m pleased to say that our disciplines are working quite well. The stocks in the Special Issue are up 25% in about a week.   

For now, the Special Issue (it picks six Indian stocks-two large-caps, two mid-caps and two small-caps) is of use only to investors putting rupees to work in the Bombay and National Stock Exchanges.  But we’re not letting the grass grow under our feet. 

It’s fun to approach these markets that haven’t been open to us.  It must be what anglers feel like when they find a completely undiscovered lake teeming with unfamiliar fish and start trying out their old tackle on them. 

Click the link below to learn more about the Special Issue.


A Slow and Steady Stock

My investing idea for this issue of Cabot Wealth Advisory is in a slightly different direction from my usual growth-oriented skyrockets.  It’s a company called Amphenol (NYSE: APH), a manufacturer of cables and connectors for the communications, automotive and aerospace/defense industries.

My idea is that many of you might be a trifle fatigued with the fluctuations of the market and would appreciate what I call a tractor, a stock that just keeps climbing, even if it doesn’t climb very fast. 

It’s not that APH can’t decline; it took a big hit in 1998 and got tossed in the surf for 15 months or so after the Tech Bubble imploded in 2001.  But since November 2002, the stock has been on a hearteningly steady growth trend that has brought it from 7 to nearly 49 with a minimum of volatility.  The biggest dip during this period was the stock’s reaction to the winter bear market.  That 27% haircut would have been difficult to endure, but the stock has worked hard since it hit bottom in March and is now in a slight pullback after taking a stately run at 50. 

APH is liquid, pays a small dividend (0.1%) and has a beta of just 1.10, which is pretty darned low.  It also has a modest following among institutional investors and earnings growth that has outrun revenue growth every quarter since the fourth quarter of 2006. 

For a weary investor in a nervous market, this might be just what you’re looking for.

Editor’s Note: On the other hand, if you’re neither tired nor discouraged by the market and want to follow some lively stocks in torrid markets, the Cabot China & Emerging Markets Report may be just what you’re looking for.  The Report has been the top-performing investment newsletter since Tom Cruise jumped on Oprah’s couch (2006), and that’s a long time in the world of growth investing.  Sounds good?  Click the link below to find out more.



Paul Goodwin
For Cabot Wealth Advisory


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