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Brazilian Stocks: The Bull Market is Just Starting

Russia has been stealing most of the emerging market headlines over the past six months and particularly this week, as Russia and Ukraine appear to have reached a ceasefire deal.  I recommended the Market Vectors Russia ETF (RSX) in July following the post-MH17 selloff, and I would reiterate that recommendation today.  After Greek stocks, Russian stocks are the cheapest in the world, trading at a CAPE of just 6. At prices like these, a value investor can afford to be patient.

But while Russia has been stealing the headlines of late, Brazil has been quietly enjoying a monster rally.  After bottoming in early February, the iShares MSCI Brazil ETF (EWZ) has risen an almost astonishing 40%.

After a run like that, it’s fair to ask: Have we already seen the big move, and are we late to the party?

EWZ

Let’s put it in context.  Brazilian stocks have arguably been in a bear market since 2008.  Brazil, along with most of the rest of the world, enjoyed a fantastic rally in 2009.  From late 2008 to late 2009, EWZ returned about 170%.  But EWZ never regained its old 2008 highs, and it has spent most of the past four years drifting lower.  Even after the 40% run since February of this year, EWZ would have to nearly double just to see its old 2008 high.  (Currency movements have also played a role here; the Brazilian real has gone from being massively overvalued in 2010 to only modestly overvalued today, using the Economist’s Big Mac index as a rough guide.)

Brazilian stocks are also quite cheap by the inflated standards of today’s markets.  Brazilian stocks trade at a 10-year CAPE of just 10.

Furthermore, there is a growing consensus that, whoever wins the coming presidential election, Brazil will be adopting a more market-friendly policy regime.

Action to take: Buy EWZ and plan to hold for 12-24 months and possibly longer for returns of 100% or more.  Use a 25% trailing stop.

What could go wrong?

The Fed.  Frankly, no one really knows what will happen when the Fed eventually tightens its monetary policy.  The so-called “taper tantrum” sent Brazilian stocks sharply lower last year, as investors feared that the resulting loss of liquidity would pull capital out of Brazil and other emerging markets heavily dependent on foreign inflows.  But as tapering has progressed over the past year, the Brazilian market appears to be adjusting just fine.  Could a surprise rate hike by the Fed rattle investor confidence in emerging markets in general and Brazil in particular?  Yes.  But given that the ECB and Bank of Japan are actually getting more accommodative, I suspect that any aggressive Fed moves will be neutralized.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Africa Is the New China

Is Africa the “next China?” Jeff Reeves and I discuss:

Africa is the most promising investment destination of the next 20 years. And it won’t be foreign development aid or Western generosity that makes the continent boom, but rather the doggedness and ingenuity of its own people. As an investor, you want to be part of this megatrend by owning shares of some of Africa’s world-class companies.

I’ve made no secret of the fact that I’m a major Africa bull over the long term, and I’m serious when I say that “Africa is the new China.” With Chinese labor costs rising and with India a chronic dysfunctional mess, the African continent is the only large geographic bloc with the potential for “Chinese-like” growth in the decades ahead. It’s the last major investment frontier.

African growth is real. Per-capita GDP has more than doubled in the past decade. And according to Deloitte, 7 of the 10 fastest-growing countries in the world are in Africa. The Economist noted last year that “Lion Economies” such as Ghana and Rwanda are reminiscent of Asian “Tiger Economies” South Korea and Taiwan at an earlier stage of development.

Importantly for my investment thesis, Africa is developing a robust middle class for the first time in its history. According to estimates by the African Development Bank and the World Bank, Africa’s middle class is already well over 300 million people, or about a third of the population. It’s a block of consumers comparable in size to the middle classes of China and India. More conservative estimates put the number closer to 120 million people, but we don’t need to split hairs. Whichever estimate you use, we’re talking about a lot of consumers.

Of course, not all African consumers spend their days sipping lattes and playing on iPads. Africa is a frontier market in the truest sense of the word; much of the continent is at a very low level of development. But the companies investing there today are the ones that will deliver a massive payoff for their investors down the road.

In his history of the world Why the West Rules–For Now, Ian Morris writes about the “advantage of backwardness,” and the logic applies to Africa today. When you are starting at zero — and let’s face it, much of sub-Saharan Africa is about as close to zero as you can get — you have little in the way of sunk costs and legacy technology to deal with. You can leapfrog existing technology and embrace the new. Why would you invest billions of dollars stringing phone lines across your country when you can skip that step altogether and just build cheaper cell towers?

Looking at Africa today, you see the same pioneering spirit that defied all odds to settle the American West in the late 1800s. Consider the story of Liquid Telecom, a phone and internet infrastructure company based in southern Africa. Liquid has done something that no Western company would have the audacity to do: string fiber-optic cable from South Africa, through Botswana and Zimbabwe, and across the Zambezi river into Zambia, a landlocked country deep in Africa’s interior. All work had to be completed by day — using work lights attracts wild animals, you see — and a section of cable was dug up by elephants and had to be reburied. (These are not problems faced by Verizon (VZ) or AT&T (T), to say the least.)

Liquid, unfortunately, is not a publically traded company. But my favorite play on the rise of Africa most certainly is: South African mobile phone operator MTN Group (MTNOY).

MTN Group can be thought of as Africa’s AT&T or Verizon Wireless. It is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. And roughly a quarter of its subscribers are from Nigeria, Africa’s largest economy — and one of its fastest growing.

Why invest in African mobile phones? Let me count the reasons.

The mobile phone is the single most important possession of the emerging global middle class. We may think of our phones as primarily a source of entertainment. But in much of the developing world, a mobile phone is a vital lifeline to the connected world, and even an important medium for money transfers. Africa will have its booms and busts along the way, but I do not see demand for mobile services abating anytime in the foreseeable future.

Looking at the fundamentals, there is a lot to like about MTN Group stock. Revenues and earnings are up by more than a third since 2008, a period in which growth has been hard to come by in most markets. MTNOY trades at a reasonable price/earnings ratio around 16 and pays a respectable, growing dividend currently yielding 3.8%. In the past five years, it has grown its dividend by about 40%. (Fair warning: Exchange rates can skew ADR payouts.)

Currency fluctuations are a problem, and weakness in the South African rand have been a major drag on the returns of U.S. investors. But here too, I expect to see improvement. The rand is one of the cheapest currencies in the world, according to the Big Mac Index. U.S. investors should get a nice one-two punch in the next year: a rising stock price in South Africa combined with a rising currency value should make the U.S.-traded ADR shares a solid performer.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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MTN Group: Connecting Africa to the World

Africa is the most promising investment destination of the next 20 years.  And it won’t be foreign development aid or Western generosity that makes the continent boom but rather the doggedness and ingenuity of its own people.  As an investor, you want to be part of this by owning shares of some of Africa’s world-class companies.

Looking at Africa today, you see the same pioneering spirit that defied all odds to settle the American West in the late 1800s.  Consider the story of Liquid Telecom, a phone and internet infrastructure company based in southern Africa.  Liquid has done something that no Western company would have the audacity to do: String fiber optic cable from South Africa, through Botswana and Zimbabwe, and across the Zambezi river into Zambia, a landlocked country deep in Africa’s interior.  All work had to be completed by day, as using work lights attracts wild animals, and a section of cable was dug up by elephants and had to be reburied.  These are not problems faced by Verizon (VZ) or AT&T (T), to say the least.

Liquid, unfortunately, is not a publically traded company.  But my favorite play on the rise of Africa most certainly is: South African mobile phone operator MTN Group (MTNOY).

MTN Group can be thought of as Africa’s AT&T or Verizon Wireless.  It is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. And roughly a quarter of its subscribers are from Nigeria, Africa’s largest economy and one of its fastest growing.

Why invest in African mobile phones? Let me count the reasons.

The mobile phone is the single most important possession of the emerging global middle class.  We may think of our phones as primarily a source of entertainment.  But in much of the developing world, a mobile phone is a vital lifeline to the connected world and even an important medium for money transfers.  Africa will have its booms and busts along the way, but I do not see demand for mobile services abating any time in the foreseeable future.

Looking at the fundamentals, there is a lot to like about MTN Group stock. Revenues and earnings are up by more than a third since 2008, a period in which growth has been hard to come by in most markets. MTNOY trades at a reasonable price/earnings ratio of 14.5 and pays a respectable, growing dividend currently yielding 4.6%. In the past five years, it has grown its dividend by about 40%. (Though fair warning: Exchange rates can skew ADR payouts.)

Is there anything not to like here?

Well, first I should state the obvious. MTN Group is based in Africa and does business in the world’s most dangerous hotspots. It’s a leading provider in Syria and Iran, for crying out loud. This is a company that is constantly exposed to macro risk.

But it’s also a company that has proven very capable of operating in those environments over its history. There could be short-term bumps, but overall, MTNOY should be able to navigate whatever unexpected surprises come its way. And its willingness to jump into markets that would give most executives heartburn gives it a first-mover advantage in the countries with the fastest potential growth rates.

Currency fluctuations are also a problem, and weakness in the South African rand have been a major drag on the returns of U.S. investors.  But here too, I expect to see improvement.  The rand is one of the cheapest currencies in the world, according to the Big Mac Index.  U.S. investors should get a nice one-two punch in the next year: a rising stock price in South Africa combined with a rising currency value should make the U.S.-traded ADR shares a solid performer.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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MTN Group: Looking For a Strong Finish to 2014

At the midpoint of the year, the InvestorPlace Best Stocks for 2014 contest is a neck-and-neck race…for 5th place.

My pick for 2014—South African mobile phone giant MTN Group (MTNOY)—is up about 4%, slightly trailing the S&P 500, and slugging it out for 5th place with John Jagerson and Wade Hansen’s Financial SPDR (XLF) and Brendan Conway’s Vanguard Dividend Appreciation ETF (VIG).

John Markman’s pick—niche MLP Emerge Energy Services LP (EMES) is running away with it this year with gains of 144%.  Kyle Woodley’s pick—last year’s momentum darling Tesla Motors (TSLA)—continues to defy bears (such as myself) and a sky-high valuation with year-to-date returns of 61%.  Rounding out the top four are Bryan Perry’s Banco Santander (SAN), which is also a favorite long-time holding of my newsletter, Macro Trend Investor, and Louis Navellier’s FleetCor Technologies (FLT) with returns of 20% and 13%, respectively.

My congratulations on the fantastic returns by a worthy group of competitors.  But now, in the second half of the year, is where it gets interesting.

Emerge Energy Services is a major supplier of sand to the major domestic shale oil drilling sites, putting it in excellent position to benefit from one of the most powerful macro trends of the next decade.  But it’s also a wildly volatile stock with a high short interest and a variable cash distribution currently yielding about 4.6%.  There are some wildly optimistic assumptions built into EMES’s stock price, so any small hiccup could send the shares tumbling.  Though with such a massive lead on the rest of the Best Stocks competition, Markman’s pick will be tough to beat.

Tesla—much to my surprise—has managed to claw back most of its losses from the March-May selloff in momentum stocks.  But Tesla’s prospects look questionable at best to me given its lofty valuation.  Tesla trades for 14 times sales, compared to 0.60 and 0.79 times sales for Daimler (DDAIF) and BMW (BAMXY), respectively.

That simply should not be; Daimler and BMW are the world’s premier automakers. I don’t see a realistic set of conditions in which Tesla grows into its current valuation.   Of course, in a one-year contest, long-term concerns like these matter far less than momentum and sentiment.

Enough about the competition.  How does MTNOY look in the second half?

MTNOY was hobbled in the first half by a weak South African economy, a polarizing presidential election, and a five-month miner’s strike that had soured investor sentiment towards the country.  The good news is that the rand looks to have stabilized for now, and the presidential election and miner’s strike are now history.  As investors rotate out of the fully-valued U.S. market and into recovering emerging markets, Africa will be a destination of choice.  Africa is one of the few bright spots for global growth right now, and MTNOY is a direct play on the rise of Africa’s middle classes.

Let’s review the bullish arguments for MTNOY:

  • It’s the dominant mobile provider in the last great frontier market: Africa.
  • It provides a service that is essential to the lives of the new African middle classes.
  • Its markets are far from saturated, and it has virtually unlimited growth potential due to the inevitable shift to smartphones and higher-margin data plans; only about a third of MTN’s subscribers currently use data
  • It’s very reasonably priced and pays a high and growing dividend; MTNOY stock has a dividend yield of 4.6%
  • MTNOY stock trades at a reasonable price/earnings ratio of 16

Bottom line: MTNOY is an excellent stock to buy and hold for the next decade.  But I also expect it to make a competitive race out of the Best Stocks contest in the second half.  Stay tuned.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Emerging Markets: Investing Where Others Fear to Tread

The best performing single-country market in 2014 is…Egypt?

Indeed it is, at least based on the performance of the Market Vectors Egypt ETF (EGPT), which was up 26% year to date through April 21.  Not a bad haul given that the S&P 500 is barely up 2% in 2014 and the Nasdaq Composite is actually in the red.

Best Performing Markets of 2014

Ticker

YTD

Market Vectors Egypt ETF

(EGPT)

26%

iShares MSCI Indonesia ETF

(EIDO)

23%

iShares MSCI Philippines ETF

(EPHE)

15%

iShares MSCI Thailand Capped ETF

(THD)

11%

iShares MSCI Turkey ETF

(TUR)

10%

iShares MSCI India Index ETN

(INP)

8%

iShares MSCI Brazil ETF

(EWZ)

6%

Nipping at Egypt’s heels is the iShares MSCI Indonesia ETF (EIDO), up 23% year to date.  The iShares MSCI Philippines ETF (EPHE) and iShares MSCI Thailand Capped ETF (THD) follow, up 15% and 11%, respectively.  And rounding out the top seven are the iShares MSCI Turkey ETF (TUR), iShares MSCI India Index ETN (INP), and iShares MSCI Brazil ETF (EWZ) with returns of 10%, 8%, and 6%, respectively.

Apart from their great returns this year—and apart from the fact that all can be classified as “emerging markets”—what do these markets have in common?

For lack of better word, all are “scary.”

Let’s start with Egypt. This is the same Egypt that saw the army overthrow and imprison its president last year, sentenced 528 people to death last month in a mass trial, and after next month’s election will almost certainly see a uniformed general—Field Marshal Abdel Fattah el-Sisi –assume the presidency.

Indonesia and the Philippines?  The Economist ranks them as 10th and 6th, respectively, in its “Crony Capitalism Index” of corrupt governments.  Thailand, Turkey, India and Brazil all make the top 16.

A separate Corruption Perceptions Index compiled by Transparency International has Egypt and Indonesia tied for 114th place out of 175 countries (0 = least corrupt; 175 = most corrupt).   And rest assured, the Philippines, Thailand and India all rank in the bottom half.

Turkey—not too long ago considered model democracy for the Muslim world—has now lurched into repression to the absurd point of banning YouTube and Twitter.   Thailand has seen violent anti-government protests since November—and off and on for the past decade.  India has been backsliding from pro-market reformed and has become hostile to Western investors—though this might change under the expected premiership of Narenda Modi.  Brazil may soon have the distinction of botching both the 2014 FIFA World Cup and the 2016 Olympics—preparations for both are woefully behind schedule.  And my favorite: Indonesia is also in the midst of a heated presidential election in which one of the candidates is a professional Elvis impersonator.

So…is the key to investment success is to buy garbage?

No, not exactly.  But we should tune out the headlines and be willing to tread where other investors aren’t.  And right now, that means starting with emerging markets.

Normally, I would use this as an opportunity to extol the virtues of value investing.  Yet the Indonesian and Philippine markets are actually quite expensive–and this despite emerging markets in general being exceptionally cheap.  Based on data compiled by Meb Faber’s Idea Farm, Indonesia was the most expensive market in the world as of quarter end with a cyclically-adjusted price/earnings ratio (“CAPE”) of 29.00.  And the Philippines, with a CAPE of 24.16, is just a hair cheaper than the United States at 25.44.  Of this year’s emerging market leaders, only Brazil and Turkey can be considered truly cheap, at CAPEs of 10.12 and 11.52, respectively.

So, what conclusions can we draw from all of this?  A value strategy will certainly lead you to potential winners like Brazil and Turkey.  But unfortunately, there is really no hard-and-fast rule to identifying in advance a hot market like Indonesia or the Philippines.  Based on any value criteria, both would have been avoided.

I wouldn’t recommend investing in Indonesia, the Philippines or Thailand at current prices. Egypt and India might both enjoy “honeymoon” rallies from new political leadership, though I’m not wildly bullish on either.   I would, however, recommend allocating to Brazil and Turkey, as both of these emerging markets remain very attractively priced even after their recent runs.  When you buy stocks near generational lows in valuations, you give yourself that all-important margin of safety. And when investing in an asset class that features Elvis impersonator presidential candidates, a little extra margin of safety might be a good idea.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.  This article first appeared on InvestorPlace.

 

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