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10 Emerging-Markets Stocks That Will Survive the Trade War

The following was first published on Kiplinger’s as 10 Emerging-Markets Stocks That Will Survive the Trade War

Photo credit: Financial Times

The old saying goes: When America sneezes, the world catches a cold. As the world’s largest importer – and holder of its largest trade deficit by a country mile – the United States is the planet’s indispensable economy. And emerging-markets stocks, with their dependence on foreign capital and high concentration in cyclical and commodity sectors, are particularly vulnerable to weakness in the U.S.

There’s nothing quite like a good trade war to give investors the jitters. But it’s not just the ongoing spat between Presidents Donald Trump and Xi Jinping that has investors unnerved. U.S. economic growth appears to be topping out for this cycle, and issues in the American market have a way of spilling across borders.

When western investors go into de-risking mode, they tend to throw out the baby with the bathwater, dumping high-quality emerging-markets stocks in a flight to cash. But in doing so, they often create fantastic buying opportunities.

Jeremy Grantham and his colleagues at Boston-based asset manager GMO are not known for being wide-eyed Pollyannas. They’re sober value investors best known for calling the last two major bear markets in 2000 and 2008. Perhaps not surprisingly, Grantham & Co. see U.S. stocks performing poorly over the next seven years, losing 3.7% per year. But interestingly, GMO expects emerging-markets stocks to return 5.2% per year over the next seven years. Even more interestingly, they see EM value stocks returning 9.8% per year.

Today, we’re going to look at 10 strong emerging-markets stocks that might give you a bit of heartburn, but ultimately should weather the trade war and reward new money. Most depend heavily on domestic EM consumers rather than on exports or trade flows, and all should be considered potential buys on any weakness in the coming months.

Tencent Holdings

We’ll start with Tencent Holdings (TCEHY), one of China’s leading technology conglomerates and, at nearly $400 billion, one of the largest emerging-markets stocks you can buy.

Tencent is a little hard to define and has no exact Western equivalent. It’s part-Facebook (FB), part-PayPal (PYPL), and part-Netflix (NFLX) with elements of Alphabet (GOOGL) and Activision Blizzard (ATVI) sprinkled in. You can consider Tencent a one-stop shop for all things related to Chinese mobile services.

Its most important product is the mobile chatting app WeChat, which is similar to Facebook’s WhatsApp (though light-years ahead of it in terms of features). In addition to the chat, audio phone calls and video conferencing you might expect from such an app, WeChat also is a leader in mobile payments via WeChat Pay and serves as an e-commerce platform.

Importantly, Tencent has sparse exposure to trade-war risk. A deep recession in China could mean lower transaction-based revenues for WeChat Pay. But most of Tencent’s revenues come from “disposable luxuries” such as smartphone games. Interestingly, while people might cut back on things such as big vacations and expensive dinners if the economy hits the skids, they tend to hang on more tightly to small, disposable luxuries. The somewhat addictive nature of video games even resembles another pair of consumer goods that do well in recessions: tobacco and alcohol.

Tencent is down about 30% from its old 2017 highs. There’s no guarantee it resumes an uptrend tomorrow, but it’s certainly a stock to buy on dips.

To continue reading, please see 10 Emerging-Markets Stocks That Will Survive the Trade War.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Hate Your 401(k) Options? Try This

As you probably know, I’m a big believer in the humble 401(k) plan. Even though it’s a very basic tax shelter widely available to regular middle-class Americans, I challenge you to find something better. I’ve spent my entire professional career looking, and I have yet to find one.

If you religiously max out your 401(k) plan every year (currently $19,000 per year or $25,000 for those 50 or older), it will likely grow to become your single largest financial asset.

There’s just one big, glaring problem with the 401(k): The investment options are often terrible.

Cruddy Investment Options 

Most plans are limited to a menu of mediocre mutual funds that move the same direction as the market. They’re fantastic when the stock market is moving higher but a financial death sentence during a bear market. The gallows humor following the 2008 bear market was that “My 401(k) just became a 201(k).” That joke will be making the rounds again after the next bear market.

And these days, hiding in bonds won’t do much for you. With yields now hitting new all-time lows almost daily, a portfolio invested in bond funds is essentially dead money.

Some 401(k) plans have a brokerage window that allows you to buy individual stocks. That’s a nice feature if your plan offers it, but it’s not available on most plans.

No matter how cruddy the investment options are in your 401(k), taking the funds out really isn’t an option. If you’re under 59 ½, you’d have to pay a 10% penalty, and at any age you’d have to pay taxes on whatever you pull out.

An Alternative to a 401(k)

Well, I have good news for you. If you hate your 401(k) investment options, you might be able to bail on them without triggering a tax nightmare. It can be possible to roll over your 401(k) balance into an IRA while you’re still working.

As you probably know, you can always roll over your 401(k) into an IRA whenever you switch jobs or retire. But if you’re 59 ½ or older, you can legally do the same thing without having to quit your job. This is what’s called an “in-service rollover.”

Your plan might or might not offer this. It really just depends on your employer. But if your company plan does offer it, an in-service rollover might be exactly what you need.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What The New SECURE Act Means For Your IRA

How can you argue with an act of Congress named “Setting Every Community Up for Retirement Enhancement” (SECURE)? Who wouldn’t want an enhanced retirement?

The SECURE act, which recently passed the House of Representatives with a vote of 417-3, is now being debated in the Senate. And at first glance, it looks great. If passed, Americans over the age of 70 ½ would still be able to contribute to traditional IRAs. And the dreaded required minimum distributions (RMD) wouldn’t start until age 72.

With Americans living and working longer, these are solid, if not exactly revolutionary, enhancements.

There’s just one big problem with it. The SECURE Act, if passed by the Senate and signed by President Trump, would turn the world of inheritance and estate planning upside down.

The Not-So Secure Act

Today, you can leave your traditional IRA to your spouse with no tax consequences. Your IRA simply becomes their IRA upon your death, and they’re then required to take RMDs based on their own life expectancy. And the IRA could then be passed on your children upon the death of your spouse, with the RMDs then based on their life expectancy.

Depending on how long your heirs and their heirs live, your original IRA can potentially be stretched out forever, indefinitely deferring the taxes on the accumulated gains.

Well, all of that might now be changing. Under the new rules, non-spouse inherited IRAs would have to be distributed within 10 years of the death of the original account owner.

Now, before this starts to sound like a scare piece, the IRS isn’t “coming after your IRA” to seize it. At least not yet. But there are some things to keep in mind.

There Are Some Key Takeaways Here

To start, the IRS will be getting more of your money and sooner. By forcing you or your heirs to distribute your IRAs sooner, your gains become taxable sooner. Ultimately, this means that your nest egg will grow slower or deplete faster.

Of course, money taken as an IRA distribution doesn’t just disappear. Once you pay the taxes on it, you’re free to reinvest it in a regular, good-old-fashioned brokerage account. It’s still able to grow and compound. It just loses the tax advantages of an IRA.

But I don’t like Congress moving the goal post on us. If they shorten the distribution timeline, they are setting a precedent for making IRAs less advantageous. That’s a remarkably short sighted move. In trying to get your money a couple years earlier, they are disincentivizing people to save for retirement.

Given that the average American has nowhere near enough money saved to last them through their golden years, that’s just about the last thing our government should be doing.

So, with all of this as a backdrop, will IRAs still make sense under the new rules?

It’s A Resounding Yes

The changes impact your heirs. I hate that my kids or future grandkids would have to pay more in taxes. But this doesn’t affect me. I still pay less in taxes today with every dollar I shelter in my 401(k) and other retirement plans, and the nest egg I need to support myself in retirement will grow a lot more quickly.

And while we’re on that subject, we’re now well into the second half of the year, but there is still plenty of time to increase your contributions to your retirement plan. You can put $19,000 into your 401(k) plan this year, not including company matching, and $25,000 if you’re 50 or older.

If you’re not on track to hit those limits, try to increase your savings rate, even if it’s just a couple hundred dollars per month. Every dollar you contribute lowers your tax bill and gets you one step closer to leaving the rat race in style.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Give Your Smartphone a Frontal Lobotomy

It’s Monday, and I want you to answer a question for me honestly: Did you check your work emails last night? Don’t look down at your shoes. You know you did it. Sunday night has become the new Monday morning, a time to go through messages on your phone, do a little light paperwork and get a start on the week.

You probably feel a little guilty and ashamed about it. I know I generally did when I found myself answering emails on a Sunday. Yet I still do it. I also found myself doing it after hours on weeknights, on Fridays and Saturdays, and on holidays and vacations.

And You Want To Know The Worst Part About It?

No one actually asked me to do it. People are reasonable, and I can credibly say that no one writing me on a Sunday afternoon really expected a reply that minute. They wrote me for the same reason I answered: We were both addicted to our smartphones and had a misplaced need to be constantly busy.

This is no way to live. It’s a dystopian nightmare in which devices that are supposed to make our lives easier and better actually make them worse. And don’t even get me started on social media. Mark Zuckerberg quite literally destroyed human civilization with Facebook. We’re now living in the new Dark Ages.

At any rate, my beat is income investing. I help my readers find a respectable stream of income in a low-yield world. But all the money in the world is meaningless if you’re too plugged in to enjoy it.

So, today we’re going to do something a little different. I’m going to help you get your life back.

I know you’re not going to get rid of your smartphone. That Pandora’s Box is open and there’s no closing it again. But we can at least claw back a little bit of our pre-smartphone humanity.

Turn Off Email Notifications

Having access to your email is great. If you’re sitting in a doctor’s office or airport, why not get a little work done?

But do you really need your phone to buzz every time a group email about the office pizza party hits your inbox?

No, you really don’t. And this is why you should turn off the notification settings. All of those pizza party updates can build up in your inbox, and when it’s convenient you can sort through them. (And by sort through them, I mean delete them all in one swoop). The important thing is that you won’t be interrupted by your phone every 45 seconds.

I know what you’re thinking… What if there is an emergency?

I’d argue that there is no such thing as an emergency email. If it is important enough, they can call you. They have your number.

Follow my lead here. I turned off all notifications on my phone except for incoming phone calls, text messages, and Uber. (I need to know if my cab is waiting for me…) And I’m considering turning off text message notifications. My colleagues know that they can always call me if something is truly urgent or time sensitive. I’m available when they need me, even if it’s after hours. They just have to call me.

Literally everything is turned off. My phone never buzzes to tell me there is an exciting new show on Netflix or that my Amazon.com package just left the warehouse. And after a week of this, I found I stopped hating my smartphone and actually began to view it as a useful tool again.

Delete Social Media Apps

I deleted virtually all social media years ago. I had a moment of truth when I looked down at my watch and realized I had just wasted two hours of a would-have-been productive day looking at pictures of fat people I went to high school with. I barely knew them in high school, before they let themselves go. So why did I just waste two hours of my life looking at photos of their trip to Cancun?

Frankly, I didn’t like the kind of person that social media made me become. Reading other people’s political rants made me miserable.

So, I pulled the plug on all of it. I have no Facebook, Instagram, or Snapchat accounts. And I can assure you that I haven’t missed anything. You don’t “have to” have social media accounts. You really can walk away from it all.

If you’re not ready to take that leap, you can at least take a preliminary step. Delete the apps from your phone. If you have to log in to Facebook on your computer, you’re going to spend a lot less time looking at cat photos than if you have the app in your pocket at all times.

I recommend you delete your accounts altogether and that you storm Facebook’s headquarters like the Bastille. But even taking the baby step of removing the apps from your phone will make you happier. Countless studies have linked social media to depression, anxiety, low self-esteem, and a host of other mental health problems. The less of it you have in your life, the better.

No Phones At The Table

We don’t have a lot of rules in my house. If I’m to be honest, I’m really a softy. There is one rule, however, that I enforce with an iron fist: no phones at the dinner table.

When we sit at the table as a family, the phones have to go away. I’m a Nazi about it. The phones have to be in a different room while we eat.

As much as I’d love to go full retrograde Luddite and banish all smartphones from my household, I know that’s not happening. But we have to have standards or we’re no better than animals. So, no phones at the dinner table. Period.

If you have a few suggestions of your own for how to regain a little shred of dignity and decency in the smartphone era, I’d love to hear them. You can write me at info@charlessizemore.com.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The 2018 Tax Filing Numbers Are In, and Most People Won’t Be Happy

Well, the IRS numbers are in from the 2018 tax-filing year. It’s the first under President Trump’s tax reforms, and the results won’t make anyone particularly happy.

It’s not that most Americans are paying more in taxes. In fact, most are actually paying less. It’s just that the difference isn’t big enough to matter to most taxpayers. The narrative is all wrong.

Red-state voters were really hoping for a windfall, but that didn’t happen. Seventy-nine percent of taxpayers got a refund. Of that, the average was $2,879. The year before the tax cuts, 80% of taxpayers got refunds, and the average was $2,908.

Sure, most taxpayers also benefitted from lower tax withholding throughout the year. It’s just that it wasn’t all that much money. The median taxpayer saw a tax reduction of less than $800. Spread out over an entire year of paychecks, that’s simply not enough to notice, let alone matter.

Meanwhile, blue-state voters believed the tax cuts to be a handout to the rich. Yet exactly the opposite was true. Many high-income earners actually saw their taxes rise by a significant amount, particularly if they were previously benefitting from a large state and local tax (SALT) deduction. The Trump reforms capped the SALT deduction at $10,000, meaning that taxpayers with large state income tax or property tax bills had a major tax deduction taken away.

Those self-employed are happy. The Trump tax breaks on self-employment income and income from LLCs and partnerships likely lowered your tax bill by a meaningful amount. But everyone else who isn’t self-employed has something to be unhappy about.

Well, I have some bad news for you. It’s not likely to get better any time soon…

Tax Rates Will Only Go Up

Let’s say the Democrats take presidency, the Senate, and manage to hold the House of Representatives in next year’s election. It’s going to be tough for them to say with a straight face that they support the downtrodden while simultaneously raising the SALT deduction for high-income homeowners. They’d be more likely to raise taxes across the board and keep Trump’s SALT deduction cap in place.

Now, let’s say that Donald Trump wins reelection and that the Republicans managed to win back to House of Representatives and hold the Senate. Additional tax cuts are still going to be a tough sell with the country running a trillion-dollar budget deficit… in peacetime… and during a steady, stable economy. The rates we have today are likely the lowest we’re going to see for years… if not ever.

Looking at the bigger picture, it’s hard to see a scenario where taxes don’t rise from today’s levels.

Next year, interest payments are expected to make up little over 10% of the total budget. One out of every 10 dollars spent will be to pay the interest on expenses from previous years. Interest is projected to be 13% of the budget by 2024. And from there, it should just snowball due to the compounding effect of interest, eating up a larger and larger share of the budget. New borrowing used to pay back old borrowing won’t leave much room for anything else.

If bond yields continue to drift lower, these numbers might end up being a little smaller. But what difference would a few hundred billion really make when you’re looking at numbers this large?

Enough hand wringing. Let’s talk about more practical matters…

Solutions That Could Save You Thousands

To start, think long and hard before upgrading your house. If you already own an expensive home, consider downsizing. I know that’s easier said than done, but you’re likely facing a future of rising property taxes with no offsetting relief via the SALT deduction. Run the numbers. It could be that renting makes more sense for you.

Secondly, get in the habit of stuffing as much money as you can into a 401(k) plan or IRA. There’s no guarantee that the government won’t move the goalpost and start applying a tax on large retirement plans if things get bad enough later. But if something like that happens, it will likely be years down the road. In the meantime, you can grow your nest egg tax free.

And consider tax-free municipal bond funds as a destination for your savings held outside of 401(k) and other retirement plans. The federal government is unlikely to eliminate the tax-free status of muni debt because it keeps the borrowing costs low for states, cities, and other local governments.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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