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.

India’s New Prime Minister: What You Need to Know

India—the world’s largest democratic country—is in the early stages of a parliamentary election that won’t be wrapped up until the last polls close on May 12 (votes will be counted by May 16).  India has the world’s largest population after China, and it is a young country with a growing voting-age population.  So every Indian election is, by definition, the biggest election in world history.  814 million Indians are eligible to vote this year.

Narendra Modi

A coalition headed by the Bharatiya Janata Party (“BJP”) and its leader Narendra Modi is expected to win

For the uninitiated, India’s politics can be a little hard to follow.  India has a British-style parliamentary system in which the leader of the political party with the highest share of the vote in the lower house of parliament is appointed as prime minister by the president (the President of India is a mostly ceremonial role; the prime minister is the head of government).

India’s system is best explained by comparison. The UK has two major parties—the Conservatives and Labour—and a large third party, the Liberal Democrats. The current Conservative-LibDem government headed by David Cameron notwithstanding, coalition governments are rare in the UK; a single party typically has the majority it needs to govern.  But in India, coalitions have been the norm since the 1990s.  India’s current government is led by the Congress party, but it is a shifting  coalition that has consisted of no fewer than 9 parties and, at various points, more than 20.

Many of these parties are regional or are niche parties with a narrow focus.  This, unfortunately, has a way of paralyzing Indian governments by making them beholden to each minority party’s pet cause or special interest group.

What are the issues?

The issues driving this election are government corruption, a stalling economy, and high inflation.  Though led by Manmohan Singh—a technocratic figure with a solid track record of pro-growth economic reforms—India’s government has not been effective at promoting growth of late.  Last year it was an uninspiring 4.7%.  Modi’s BJP party is viewed as being more pro-business, and Modi himself has a reputation as an effective leader who is capable of cutting through bureaucracy.

What are the controversies?

The ruling Congress Party is accused of turning a blind eye to corruption among government officials.  The BJP—and Modi in particular—is accused of stirring up animosity between the majority Hindu and minority Muslim populations.  Modi has been accused of encouraging violence against Muslims, though these claims are disputed.

Who is likely to win?

Polls point to a Modi / BJP win, though a stronger-than-expected showing by the anti-corruption Aam Aadmi party could complicate the forming of a coalition.  Modi will most likely be the next prime minister of India, but his ability to govern effectively will depend on the size of his majority.

What does this mean to investors?

A strong majority for the BJP-led coalition would be welcomed by the financial markets.  The BJP—a center-right party roughly similar to America’s Republicans—is viewed as being friendlier to business and less tolerant of official red tape.

Does this mean that you should run out and buy shares of Indian stocks, such as the MSCI India Index Fund (INDA) or the MSCI India Index ETN (INP)?  In a vacuum, no.  But Indian stocks have been outperforming this year and, in the broad emerging-market bull market that I expect, Indian stocks are worthy of consideration as a part of a broad emerging-market portfolio.



Investing in Mongolia? Yes, Mongolia.

On the outskirts of Ulaanbaatar, a nomadic family of herders is sitting outside their ger (the family tent commonly called a  “yurt” in the West)  watching Bloomberg TV…on a high-definition flat-screen television powered by a mobile solar generator and a satellite dish.

Only in Mongolia.

178As Harris Kupperman, President of Miami-based hedge fund Praetorian Capital, steps inside the ger, the man of the house—smartphone in hand—asks: “Mr. Kupperman, you’re a money man. I’ve been watching the news about the crisis in the Eurozone.  How do you see this affecting the price of my cashmere?”

This particular blend of sophistication and simplicity is a mixture you will find—again—only in Mongolia.

Though it is far off the beaten path of most investors, Mongolia has quietly emerged as the fastest-growing economy in the world.  In 2014, the Mongolian economy is expected to grow by a blistering 15.3%, and the IMF expects it to be the fastest-growing economy in the world over the next decade.

If you haven’t heard about the Mongolian growth story, there is a good reason. Despite its recent growth, Mongolia’s GDP is only around $11 billion. To put that in perspective, the economy of West Virginia is roughly six times as large.  And Mongolia, despite its enormous size (more than double the size of Texas), has a population of only about 2.8 million people—roughly 30% of whom still live a nomadic or seminomadic lifestyle.

Yet a surprising 70% of Mongolian nomads have access to electricity  and with it communications.  And given Mongolia’s richness in natural resources—Marc Faber called Mongolia the “Saudi Arabia of Asia”—and its strategic location next to China, the worlds’ most rapacious consumer of natural resources, there is every reason to believe that the boom is sustainable.

Kupperman, who in addition to his responsibilities at Praetorian Capital also serves as Chairman and CEO of Mongolia Growth Group (MNGGF), was gracious enough to sit down with me for a Skype interview from his office in Ulaanbaatar.  Here are some of the highlights:

Sizemore: Thanks for taking the time, Harris.  I want to start with the most obvious question: Why Mongolia?

Kupperman: One word: growth.  In the developed markets, we’re lucky to get 1%-2% GDP growth in a year. In Mongolia, we see that in a month.  But unlike some of the other high-growth markets out there—think Iraq or Libya—Mongolia is actually safe and politically stable, and the people are very welcoming to foreigners.  There is roughly $2 trillion of mining commodities in the ground, and this could easily be a $100-billion economy by 2025.  We’re simply looking to put our capital in front of that growth.

Sizemore: As far back as 2003, when he published Adventure Capitalist, Jim Rogers spoke of “digital Mongolia” and noted that Mongolia was leapfrogging legacy technology—things like power and phone lines—and jumping directly into the digital era.  What has your experience been?

Kupperman: I find that the internet works when the electricity works [laughing].  No, in all seriousness, I rarely have problems here.  The internet speeds are generally a lot faster than what I get in Miami…and this in a country with few paved roads.  I’ve been very impressed by how quickly Mongolians adapt to new technology.  Remember, this was a very simple pastoral economy just a few years ago, but today herders have access to real-time market data via smartphones.  In the past, a herder had very little negotiating power with the middlemen that bought their cashmere and sold it on international markets.  The trader had a big informational advantage, and the herder generally had to take whatever price was offered.  But today, the herders have access to the same information as the traders.

Sizemore: What about China? Are you concerned about China’s slowing growth and what that might mean for Mongolia?

Kupperman: I’m not that concerned.  Sure, Chinese growth is slowing.  But it’s still growing at a phenomenal rate for an economy of its size, and, frankly, the Chinese government can’t afford to let the growth story fall apart.  The Chinese boom will last longer that just about anyone today thinks possible.  There will be ups and downs, of course, and the double-digit growth is probably gone forever.  But I think the broader China growth story still has another several decades before it really hits a wall.

Sizemore: You’ve convinced me on the Mongolia growth story.  Now, how to you plan to profit from it?  Mongolian equities?

Kupperman: Well, you could buy Mongolian equities.  But remember, this is a frontier market in the very early stages of development, and securities regulation is still very new here.  And liquidity isn’t exactly what most American investors would be accustomed to.  Believe it or not, real estate is actually a lot more liquid than equities here.  The trading volume in Mongolian stocks can be as small as $50,000 to $100,000 per day.  And that is not for a particular Mongolian stock, that is for the entire Mongolian stock market.  In our view, real estate is the best and most conservative way to play the Mongolia growth story.

Sizemore: And how does Mongolia Growth Group invest in Mongolian real estate?  What does your portfolio look like?

Kupperman:  Our primary strategy is to buy retail properties located along the capital’s main avenue.  As Mongolia develops, its economy will get more sophisticated, and rents will inevitably rise.  We’re looking to profit from that transformation of a store front from a noodle shop to an Armani store, if you will.  We also invest in office properties.  But we find that retail gives us the best prospects for large rent increases.  And that is the real investment story here.

Sizemore: Thanks, Harris.

Real estate investors have a nasty tendency to get overleveraged.  That’s fine—so long as property prices are rising.  But whenever there is a setback, they find themselves in the uncomfortable position of having to sell assets at distressed prices. And perhaps worse, their capital dries up at precisely the time that bargains abound and you would want to put new cash to work.

Having lived in Miami through the 2008-2009 washout, Kupperman has seen firsthand how devastating it can be to be overleveraged in real estate.  So, unlike virtually all property investors, he has kept his Mongolia Growth Group debt free.  And in fact, as of the company’s latest filings, it has about 15% of its book value in cold, hard cash—ready to pounce if the opportunity comes around.

Kupperman also “eats his own cooking,” which is something I like to see.  He personally owns about 15% of the company, and management collectively owns about a third.  And like Kinder Morgan’s (KMI) Richard Kinder, Kupperman does not take a salary for his work.  He only makes money if his investors do—via long-term capital appreciation.

Mongolia Growth Group is too small and thinly-traded for me to officially recommend, as its market cap is only about $60 million.  It’s also something of a falling knife at the moment, down more than 60% from its 52-week highs.

Still, for the speculative part of your portfolio—that part of the portfolio where you invest in your “off the wall” ideas with the biggest profit potential—I would say that Mongolia Growth Group deserves serious consideration.  Just remember, if you do buy, use a limit order.  And given that any investment in Mongolia should be consider a long-term speculation, don’t invest any funds you couldn’t afford to do without for the next five to ten years or more.  And finally, don’t try to call the exact bottom here.  Wait for the current bout of frontier market volatility to pass, and only buy the shares once they appear to have resumed an uptrend.

Disclosures: As of this writing, Charles Sizemore was long KMI.

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 market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.  This article first appeared on InvestorPlace.

MTNOY – Traverse the Wilds of Africa for 2014′s Best Stock

Editor’s note: This column is part of our Best Stocks for 2014 contest. Charles Sizemore’s pick for the contest is MTN Group (MTNOY).

Investors have pretty well forgotten about emerging markets over the past three years. The “BRIC” countries of Brazil, Russia, India and China no longer excite. Nor do more exotic non-BRIC locales such as South Africa. The iShares MSCI South Africa ETF (EZA) is down by roughly 15% since the beginning of 2011, while the S&P 500 has gained nearly 45%.

I’ve made no secret of the fact that I’m a major Africa bull. It’s the last major investment frontier, and the growth is very real. Per capita GDP has more than doubled in the past decade, and according to Deloitte, seven of the 10 fastest-growing countries in the world are in Africa.

One sign of the booming middle class is Africa’s surprisingly high cell phone penetration; by Ericsson’s estimates, the continent already has 780 million mobile subscribers.

Don’t underestimate the significance of this. Africa has harsh geography, which makes building infrastructure very difficult and very expensive. But mobile technology allows large parts of Africa to essentially leapfrog over legacy technology infrastructure — such as copper phone wires — and into the modern world.

This is showing up in some interesting places. For example, mobile phones are giving millions of working and middle-class consumers access to basic banking services for the first time. According to Deloitte, “a 10% increase in mobile phone penetration in a poor country is linked to an increase in GDP of 1.2% due to the ensuing economic activity that people engage in as a result of being ‘plugged in’ and connected.”

For a part of the world that has been more or less in isolation since the dawn of time, this is a game-changer.

Why You Should Buy MTN Group (MTNOY)

By now you might have guessed that my recommendation is an African telecom stock. So with no further ado, here it is: South African telecom giant MTN Group (MTNOY).

MTN Group is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. Roughly a quarter of its subscribers are from Nigeria alone.

Although most Americans have never heard of MTNOY, its brand has cachet in large swaths of the developing world. MTN’s brand made the Brandz list of the Top 100 Most Valuable Global Brands in 2013, coming in at No. 79. It’s the first African company to make the list.

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 13 and pays a respectable, growing dividend currently yielding 4.5%. MTN Group grew its dividend by 10% in 2012 and is on pace to grow its 2013 dividend by 15%. In the past five years, it has grown its dividend by about 45%. (Though fair warning: Exchange rates can skew ADR payouts.)

The bullish case for MTN Group is straightforward:

  • 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.

What could go wrong?

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, 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.

Next is competition. While MTN Group has the biggest presence in Africa, it’s not the only player. Britain’s Vodafone (VOD), through its subsidiary Vodacom, is also very active in Africa and in fact has a larger market share in MTN’s home market, South Africa. But this is the beauty of operating in growing, non-saturated markets. Hundreds of millions of Africans have yet to buy mobile phones … let alone smartphones. A rising tide lifts all boats.

The rise of Africa is real, and you should be investing in Africa.  MTN Group gives us direct access to the new middle-class African consumer.


So Brazil, About That Currency War…

In the international currency war, it would appear that Guido Mantega has turned traitor and gone over to the other side.

If you’re not familiar with Mr. Mantega, he is the colorful—and quotable—finance minister of Brazil and one of the most vocal critics of the easy money policies pursued by the United States, Europe, and Japan.  It was Mantega who introduced us to the term “international currency war” in 2010 and—with a touch of bravado—promised that Brazil wouldn’t lose.

What did he mean by that?  Mantega was concerned that the soaring price of the Brazilian real (or the plunging price of the dollar, euro and yen, depending on your perspective) due to loose monetary policy in the developed world put Brazilian exporters at a disadvantage and ran the risk of hollowing out the economy by making manufactured imports artificially cheap.


Source: tradingeconomics.com

For perspective, take a look at the embedded chart. I set the start date to 2003, which happens to correspond to the year I went to Brazil for the first time.  It almost brings a tear to my eye to think that I could buy a steak dinner for the price of a Big Mac then.

Alas, those days are over.  In 2003, a dollar would buy you 3.5 Brazilian reais.  But as yield-hungry investors and speculators jumped into the market throughout the 2000s emerging markets boom, the real more than doubled in value in dollar terms.  By the beginning of 2011, a dollar would barely buy you 1.5 Brazilian reais (for those unfamiliar with the terminology, “reais” is the plural of the “real,” Brazil’s currency).

As the real continued to strengthen, Mantega did everything in his power to weaken it.  In an attempt to deter “hot money” speculators and Western fund managers, he instituted a tax on foreign investment…and then raised it to 6%. He also encouraged the central bank governor to go on an aggressive dollar buying spree.

Generally speaking, it’s a bad idea to bet against a country that is determined to weaken its currency.  Strengthening a currency is tough; it requires a fat stash of hard currency reserves and an ability to instill confidence in a fickle, temperamental market.  But weakening a currency requires nothing more than a willingness to print money and flood the international currency markets with it.

Brazil won the currency war.  The real had been steadily weakening since mid-2011…until the U.S. Fed’s “taper scare” turned the decline into a rout. Now the victory is looking like a Pyrrhic one, and Mantega and his compatriots are more concerned about a destabilizing currency collapse.  The foreign transaction tax has been scrapped, and the central bank is actively intervening to prop up the real with a new $60 billion program.

All of this has sent investors running for the door.  The iShares MSCI Brazil ETF ($EWZ) is down 21% year to date in a year when the S&P 500 is up 20%.  The Brazilian Bovespa, in local currency terms, is down only 14%.  Most of the damage came in the May/June “taper” scare, which rattled India, Turkey, and most of the rest of the emerging world as well.

So, what are we to do with this information?  Is Brazil cheap enough to warrant a look after the recent rout?

iShares MSCI Brazil (EWZ)
iShares MSCI Brazil (EWZ)

Brazil is reasonably cheap.  By Financial Times estimates, the broad market trades for about 15 times earnings and yields 4%.  And after the recent slide, the real is sitting near five-year lows.  The currency could always go lower, of course.  But it would appear that the hot money has largely already fled the coup.

Brazil has also been rattled by the slowdown in China, which has hit all commodity-producing countries hard.  Yet the recent data coming out of China suggests that the worst might be behind us.  Industrial production and fixed investment both saw improvement in the latest data release.

Finally, we get to market psychology.  This is notoriously hard to measure and subject to change at the drop of a hat.  But in general, investors haven’t exactly been lining up to buy emerging market stocks.  Emerging market mutual funds and ETFs have lost nearly $6 billion in outflows this year, suggesting that investors have given up hope.  All else equal, that’s a contrarian bullish sign.

I may be a little early on this trade, but I would recommend accumulating shares of Brazilian and other emerging market stocks at these prices.  It’s not time to back up the truck just yet, but I would start with a small position and average in over the course of the next several weeks.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no position in any stock mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”