Keep in mind, despite the recent poor performance, several emerging stock markets are still among the best-performing assets in 2016. The iShares MSCI Emerging Market Index ETF (EEM) is up 1.9% year-to-date, compared with a gain of just 0.8% for the SPDR S&P 500 ETF (SPY), up just half as much.
Better yet, emerging markets remain almost universally disliked by investors right now …
And that’s a big contrarian buy-signal in my book
Want evidence? Here’s Exhibit A:
The recent losing streak for emerging stocks produced this headline from Bloomberg: “Emerging Stocks Extend This Year’s Longest Slump on China, Fed.“
|After taking big hits, emerging markets, such as Singapore, are undervalued.|
The article goes on to cite a litany of reasons why emerging stocks are doomed. At the top of the list are: political turmoil in Brazil, China’s slowing growth and of course the Fed’s intention to raise interest rates.
But these “problems” are well known by investors already, and are likely fully discounted by markets.
For example, China is a big component of the Emerging Market Index and its stock market declined this week on soft trade data, with imports down for the 18th straight month.
But what’s new here? Nothing! Imports have been slumping for a year and a half already. And how about Fed fears?
Are emerging markets really doomed because the Fed is raising interest rates?
Please! Watching my grass grow is more action-packed than the Fed’s monetary policy deliberations. They’ve been talking about “normalizing rates” for over a year now, and we have one 0.25% hike to show for it.
Meanwhile, most of the rest of the world is moving the other way, deeper into negative interest rates, and that’s bullish for stocks, especially in emerging markets.
Why? It’s because emerging stocks have more upside potential than other markets.
That’s the big added bonus: Emerging-market stocks are dirt cheap right now, which provides greater upside potential, AND a valuable margin-of-safety for buying these often volatile stocks.
Case in point: The S&P 500 Index is priced at more than 19 times earnings at present. Meanwhile, check out these ultra-low price-earnings (P/E) ratios in select emerging stock markets:
- Hong Kong P/E = 14.3
- South Korea P/E = 12.7
- Singapore P/E =11.5
- China P/E = 11.3
These are all screaming bargains compared with U.S. and European stocks. And do you see a pattern here?
All of these markets are located in Asia, which in addition to being dirt cheap, also happens to be the fastest-growing region of the world right now.
That’s right, in spite of rampant fears over China’s “slowdown,” its economy is still expected to grow 6.3% in 2016, according to IMF forecasts.
The Emerging Asia region overall should grow at a 6% clip both this year and next
Folks, that’s the best GDP growth rate anywhere on the planet. This compares to a U.S. GDP growth estimate of just 2.6% and eurozone growth of only 1.7% this year!
So from a contrarian perspective, perhaps the recent pullback in emerging stock markets is no reason to panic.
Instead, maybe it’s a great second-chance buying opportunity, if you missed the last time these fast-growing markets were on sale in January.
These markets are still bargains now, and just got cheaper over the last few weeks
Here’s an easy way to play it in a single trade: The iShares S&P Asia 50 Index ETF (AIA) tracks a Standard & Poor’s index of 50 of the largest Asian blue-chip stocks trading in China, Singapore, South Korea, Hong Kong, Taiwan and more.
As an extra bonus, AIA offers a 2.8% dividend yield and has a P/E ratio of just 10.6. Too cheap to pass up!
As the U.K. moves closer to its June 23 referendum on European Union membership, the Bank of England heightened its warnings about the risks Britain faces should the “Leave” vote prove to be the winner, saying the pound could fall sharply and unemployment likely rise. The central bank had cut the U.K.’s growth forecast for this year to 2.0% from 2.2% in February, reflecting how uncertainty about the referendum is weighing on the economy.
“Sterling is also likely to depreciate further, perhaps sharply. This combination of influences … could lead to a materially lower path for growth and notably higher path for inflation,” the BoE said in its latest economic forecasts. British Finance Minister George Osborne said the BoE assessment was a “clear and unequivocal warning” that leaving the EU would be a “lose-lose situation for Britain.”
Diapers on the job? Some 250,000 poultry workers are routinely denied bathroom breaks, leading some to wear diapers and others to not drink liquids. That’s according to a report by Oxfam America, the group that reports on conditions that violate U.S. workplace safety laws. The group urged Tyson Foods (TSN), Pilgrim’s Pride (PPC), Perdue Farms and Sanderson Farms (SAFM), which control nearly 60% of the U.S. market, to improve workers’ conditions, CBS MoneyWatch reports.
“It’s just basic human dignity, the right to be able to use the bathroom when you need to, as opposed to having to hold it for two hours until the next break, or worse, having to wear diapers or urinating or defecating on yourself,” Hunter Ogletree, an organizer at the Western North Carolina Workers’ Center, told CBS MoneyWatch.
Oxfam cited the group’s year-long review of conditions at the Case Farms plant in Morganton, N.C., which found the bathroom issue to be the top concern for its 800 workers. The employees, who receive pay of about $10 an hour, recently initiated a petition drive calling on the company to let them have bathroom breaks. Oxfam did acknowledge that allowing bathroom breaks is a logistical challenge at a poultry plant. It is an industrial operation where the entire line slows if one part stops, it said. Workers who want to use the bathroom must ask a supervisor, who must find another person to take the spot on the line to keep it running.
Macy’s Inc. (M) and Kohl’s (KSS) reignited fears about the health of the retail sector in the U.S., posting depressing quarterly sales results. Both companies’ shares tumbled in response. Kohl’s said first-quarter earnings fell 50%. Revenue fell 3.7% from the year-ago period to $3.97 billion, missing estimates of $4.13 billion. Macy’s said first-quarter sales fell 7.4% year-over-year. Macy’s cut its full year same-store sales guidance to a decline of 3% to 4% against previous guidance of a 1% drop.
Your thoughts on Brexit – should it stay or should it go? Your comments are welcome, especially if you’re in the U.K. or in Europe. Will the EU collapse if the U.K. pulls out? Should workers have a right to a bathroom break? Would you do what those poultry workers are doing — if you were desperate for a job? And is the retail-store model dying in the face of online sales? Comment below.
The Money and Markets team