A good starting point is an exchange-traded fund (ETF): the Vanguard Emerging Market Fund (NYSE: VWO, Stock Forum).
Every once in a while, every serious, long-term investor ought to stop, look around and ask himself (or herself), “What asset class can I invest in now that is unequivocally cheap?”
My answer today is emerging market stocks.
This may take many investors by surprise. After all, emerging markets equities, as a group, have plunged 16% this year vs. a 15% gain in the S&P 500. And mutual fund cash flow figures show that mom-and-pop investors are pulling money out in droves.
But, in a sense, that’s just my point. If you want to buy low – the prerequisite if you intend to sell high – it pays to look at what is currently a bargain. And history shows that a great place to start is with what the majority of investors are selling.
Last June, for instance, I wrote an Investment U
column making the case for investing in Japan
. I pointed out that economic growth there was slow, the national budget crisis there was worse than our own, and the Tokyo market had been comatose not just for years but for more than two decades.
But I also pointed out that Japanese stocks were so inexpensive that if they doubled they would still be cheaper than U.S. stocks – and added, “You now have the opportunity to buy dirt-cheap, cash-rich Japanese companies that are in turn, buying up depressed and undervalued assets around the globe.”
Let Yourself Get Lucky
My column came out just as the Tokyo market was hitting its 52-week low. But beginning in November, it put on a furious rally, climbing 40% in just six months.
That, in technical terms, is called “luck.”
I couldn’t know the market was about to put on a bravura performance. But the payoff for buying low is that things often take off without warning.
And that, in my view, is where we are with emerging markets today. Let’s start with an overview.
Developing nations cover 77% of the world’s land area and represent 85% of the world’s population. There are now 3.9 billion “middle class” people in the world today. And thanks to emerging market growth, that number is likely to double over the next 20 years.
As The Wall Street Journal
“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, and Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months. These men and women will need everything, electricity, water, food, health care, shelter, schools, computers and, of course, jobs.”
The investment implications here are stupendous. Yet I speak to many Americans who say their emerging market exposure is somewhere between meager and nonexistent.
Don’t be one of them.
Equity markets in Latin America, Asia and Eastern Europe are sitting on the remainder table. Emerging-market stocks now trade at 1.44 times book value, below the low end of their historical range of 1.5 to 2.5.
How to Play It
While there are plenty of individual stock opportunities in these markets, a good starting point is an exchange-traded fund (ETF): the Vanguard Emerging Market Fund
, Stock Forum
It was price this week at $40.74, leaving a market cap of $50.3 billion, based on 1.2 billion shares outstanding. The 52-week range is $45.54 and $36.01.
The companies in VWO trade at just 10.6 times estimated earnings and about 10 times prospective earnings for 2014. (Compared to 15 times trailing earnings for the stocks in the S&P 500.) VWO also trades at a price-to-sales ratio of 1 vs. a historical average of 1.4 times sales. Plus, you’ll collect a dividend yield here of 3.9%.
That makes it a comfortable wait while you’re waiting for the tide to turn, which it will eventually. All that’s required is a little time and patience.