Profit From Emerging Markets Right Now — And Get A 3% Dividend
If you’ve been investing in countries such as South Africa and Brazil, the phrase “bear market” comes to mind. Their stock markets are off more than 20% this year, and Russia, Mexico, China and Turkey aren’t far behind.
Some of those losses are attributable to weak foreign currencies, but no matter the cause, many investors are rethinking the wisdom of global investing. That’s a shame, because despite their volatility, these are the same countries that are quickly transitioning from emerging economies into developed economies.#-ad_banner-#
Still, 2013 is shaping up to be a lost year. Analysts at S&P Capital IQ expect aggregated profits across emerging markets to fall roughly 4% in the 12 months ahead. Compare that outlook to the expectations for modest gains here in the U.S.
Yet these analysts cite another stat you simply can’t ignore: Whereas U.S. stocks trade for 13.6 times projected profits, that multiple is just 9.4 for emerging markets. Considering that emerging markets typically sport more robust long-term growth prospects than developed markets, that’s led some to sense a clear buying opportunity.
If you want to play the emerging markets angle but are daunted by the risk, then focus one of our favorite exchange-traded funds: the WisdomTree Emerging Markets Equity ETF (NYSE: DEM). It’s a member of our “Forever Stocks” portfolio for a good reason. Its focus on dividend payers should help keep it aloft in the coming quarters, even if many economies slump.
How do we know this ETF will survive this year’s slowdown intact? History already tells us so. Back in 2009, while the global economy was still reeling, this fund‘s payment streams took only a moderate hit. The ETF’s dividend distribution was reduced from $1.90 a share in 2008 to $1.46 in 2009. And the dividend rebounded nicely, approaching $2.28 a share in 2011.
Of course, the fresh economic weakness this year means that the dividend will likely be below $2 a share, but as the global economy stabilizes in 2014 and 2015, look for payouts to again reach record heights. Our confidence in that outlook stems from this portfolio’s construction. Many of its holdings are leveraged to rising middle classes. For example, more than 50% of the companies in this portfolio are in financial services, telecommunications and information technology.
Another important aspect of this fund is its diversification. It holds over 200 high-yielding stocks, giving extra weighting to higher yielders when it comes to for quarterly rebalancing. “Thanks to its dividend-weighting strategy, DEM has had a high-quality portfolio relative to the cap-weighted MSCI Emerging Markets Index,” note analysts at Morningstar, who give this fund a perfect five-star rating. The 0.63% expense ratio is roughly in line with the peer group.
The Fresh Opening
I am talking about this “Forever” investment right now because it has suddenly moved out of favor. I like to track quality investments like this, especially if they have a great long-term positioning, whenever their shares have been discounted. And as this chart shows, investors are fleeing.
The key with a slumping investment is to wait for a base to form. If this ETF stays in the $46 to $47 range in coming sessions, it’s a sign that sellers have largely been exhausted.
Risks to Consider: Emerging markets may not have yet hit bottom, so it’s crucial that you maintain a long-term view when buying into these markets.
Action to Take –> The recent slump in emerging market equities has made them even more of a value when compared with U.S. stocks. Such a wide disconnect in valuations only comes along once every five or 10 years, often creating a great entry point for investors who had held off from taking on emerging market exposure.
P.S. — My colleague Elliott Gue and his staff recently went looking for the absolute best stocks on the market. The goal: Find securities good enough to buy, forget about and hold “Forever.” After six months and $1.3 milllion worth of research, the team was successful. DEM is one such asset; to learn more about the other “Forever Stocks” they uncovered — including names and ticker symbols — click here.