The Best Bets for Today's Investment Landscape
Today's investment landscape stinks. With burgeoning government debt, shrinking growth prospects, the housing market in shambles, and the sluggish consumer, we don't have many traditional drivers of the economy in place. This leaves investors with few attractive asset classes in which to park their hard earned capital.
And since most of us don't have the luxury of waiting on the sidelines, you need to save and (heaven forbid) earn a decent enough return on your savings to fund your retirement, to buy a home for your family, to put your kids through school, or to meet any of the myriad financial burdens life places on us. This puts the average investor between a rock and a hard place. Having already touched on "high-quality" U.S. stocks last week, I'll elucidate today on the other major area I think holds some attractive opportunities for long-term investors -- emerging markets.
Back to the basics
Although not sexy, what value investing lacks in flare, it makes up for in substance. Buying shares of companies on the cheap statistically provides returns above the stock market's (excess returns in investing parlance). And over the past 10 years, no asset class performed for investors like emerging-market equities. Although they're not exactly the secret story line they were 10-15 years ago, most investors at least have a grasp on the broad strokes of the emerging-markets storyline and the drivers spurring their impressive growth. However, most investors probably haven't noticed that these markets seem to have lost a lot of respect since fear (mostly related to the developed world) took root in the market. The relationship between fundamentals and returns for U.S. and international stocks now seems completely out of whack.
Index & Geography
Net Income Margin (%)
Return on Equity (%)
12 Month Return
Real GDP Growth
|Shanghai Stock Exchange||11.9||10.3%||17.6%||(17.9%)||9.1%*|
|Brazil IBOVESPA Index||8.1||17.1%||18.4%||(24.9%)||3.1%**|
|Bombay Stock Exchange Sensex Index||15.0||12.6%||18.6%||(15.4%)||8.8%***|
Source: S&P Capital IQ.
*For quarter ended Sept. 30.
**For quarter ending June 30.
***For full year 2010.
Moving forward, these key emerging-market exchanges have plenty of appealing characteristics, especially when contrasted against the flagging prospects of the developed world. Broadly speaking (we are talking about entire indices here), they certainly seem cheap, with each of these indices trading near or less than the levels of American markets despite their undeniably rosier growth profiles. Also, with better margins and returns for owners, these stocks seem like ideal places to both escape the malaise threatening the developed world and to find investments that supported by long-term tailwinds.
A piece of the action
So how can you get involved? Several ways, actually. If you want broad market exposure, you can simply buy into one of the many funds that concentrate on specific countries or regions. On the ETF front, you could look into the FTSE China 25 Index (ASE: FXI) , MSCI Brazil Index (ASE: EWZ) , and the Wisdom Tree India Earnings ETF (ASE: EPI) , or the closed-end India Fund (ASE: IFN) . These kinds of ETF plays will give you direct exposure to the country of your choosing while cutting out much of the hassle that buying shares directly can create. You'll also enjoy greater liquidity than you might otherwise find in trying to own individual shares. For the investor who wants the exposure without the legwork, these options seem compelling.
You might also want to try your hand at directly owning shares in some international stocks that trade on American exchanges. These companies all have the same direct exposure to a specific emerging market and pretty compelling characteristics.
P/ LTM Diluted EPS Before Extra Items
Net Income Margin
Return on Equity
|China Mobile Limited (NYS: CHL)||China||10.3x||24.4%||21.5%||4.2%|
|Vale S.A. (NYS: VALE)||Brazil||4.9x||42%||34.2%||4.3%|
|Petroleo Brasileiro (NYS: PBR)||Brazil||5.6x||18.2%||16.7%||4.2%|
|Sterlite Industries India (NYS: SLT)||India||7.2x||16.6%||14.5%||0.9%|
|Yum! Brands (NYS: YUM)||US.-.based with huge global exposure, particularly in China||20.1x||10.2%||67.4%||2.2%|
Source: S&P Capital IQ.
On a fundamental level, these companies all look distinctly cheap, trading at lower multiples than their home-market multiples, with Yum! Brands appearing to be the lone exception. And even more exciting for investors, each of these companies also offers comparable or higher returns on equity and stronger margins than their home markets. Their performance characteristics leave developed markets in the dust. And in keeping with their direct exposure to their home markets, they all stand to benefit as the markets they serve grow and demand for their goods or services increases. As an additional sweetener, each firm also actively pays out to its shareholders, making the return profiles all the more enticing. These figures look pretty compelling even before factoring in their underlying growth stories.
Foolish bottom line
Whether you simply want to avoid the beleaguered developed markets until they look safer or want to juice your portfolio's growth prospects, adding some emerging-market exposure, especially at present, makes perfect sense for most investors. You have to understand the risks, but if done properly, buying into emerging markets, especially on the cheap, can help your nest egg thrive for the long haul.
Emerging markets offer some compelling options for investors. Likewise, the Motley Fool recently compiled report 13 High-Yielding Stocks To Buy Today detailing potential opportunities in the market. It's totally free to our readers. With current developed markets looking as bleak as they do, you need an edge to your investing research. Access your free copy today to get that leg up you need.
At the time this article was published Andrew Tonner holds no financial position in any of the securities mentioned in this article. The Motley Fool owns shares of Yum! Brands and China Mobile.Motley Fool newsletter serviceshave recommended buying shares of Yum! Brands, Sterlite Industries, China Mobile, and Petroleo Brasileiro. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.