The Trump Administration will likely create a tremendous opportunity for investors in several emerging markets. "What?" I can hear some of you saying, "Didn't this guy just write an article trashing emerging markets and warning investors to stay far away?"
Yes, that is the truth. I am expecting the primary emerging markets like China, Thailand, Brazil, and South Korea to struggle under pending economic changes in the United States.
However, there are two emerging markets that I think will thrive despite the potential for radical domestic policy change.
Finding The Good Side Of An International Slowdown
An interesting truth about the stock market is that every negative has a corresponding positive. Even in the direst bearish markets and individual company situations, someone is earning profits from the turmoil. Another similar market fact is that there is an exception to every rule. No matter how many examples can be shown that a certain market or stock behavior occurs after XYZ happens, there are other examples where it does not happen.
In fact, there are two emerging markets that will likely continue to prosper despite what changes may happen in the world's largest economy.
The number one emerging market that should benefit greatly under a Trump presidency is Russia.
Russia is the world's largest oil producer and has a population of over 140 million. After being beaten down by a double whammy of low oil prices and economic sanctions, the Russian economy has turned the corner to improvement. Add in the obvious respect and friendship between Vladimir Putin and Donald Trump and you have a compelling investment case.
Russia-based ETFs, such as iShares MSCI Russia (NYSE: ERUS), have climbed over 60% since January. I firmly think that the Russian market can easily advance another 50% from the current price. Here's a closer look.
The number one reason for my bullishness on Russia is the fact that Vladimir Putin wants to get along with and do business with the United States. Once bitter enemies, a long process of putting aside differences has cumulated in the election of Donald Trump. Both leaders have cited their respect for each other on numerous occasions, which will likely lead to trade barriers being lowered or eliminated.
Next, Russia's internal economic upgrades reflect a desire to embrace Western-style capitalism. The country is committed to a convertible currency, infrastructure improvements, transportation upgrades, including a railroad to the North Korean seaport of Rason. Add in government programs in support of startups and encouragement of foreign investment and it turns this once anti-capitalist nation into a burgeoning economic giant.
Finally, Russia is seeking to slash dependence on foreign tech companies like Alphabet (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). The directive to nationalized internet and high-tech industries has created domestic versions of multiple U.S. tech services and products. Efforts to build strategic leadership in the internet business will likely supercharge Russian economic growth.
The above changes, combined with the fact that Russian equities are currently trading at less than seven times earnings and an average dividend yield of over 7%, creates a very compelling investment thesis.
Another Unexpected Winner
The next emerging market that will likely create profits over the next several years is Africa.
Many investors do not even know that Africa is on its way to becoming a thriving economy. A quick look at the continent reveals that there are currently fifty cities of over one million citizens each across fifty-four countries with twenty-one stock markets trading shares of one thousand different companies.
Africa is chock full of under-developed natural resources, and the annualized GDP is forecast to grow at six percent over the next decade. Despite the resources, the continent's Sub-Saharan stock markets consist of a total value of just 50% of ExxonMobil's market capitalization. In other words, Africa is an opportunity in its infancy.
Other bullish facts include that between 2011 and 2015 seven out ten of the world's fastest growing economies were on the continent of Africa. Ethiopia is third on the list at an estimated 8.2% annual GDP growth, and Nigeria comes in tenth with an estimated 6.8% GDP growth. In fact, China, India, and Vietnam are the only non-African nations on the top 10 list.
Drilling down into the African stocks themselves, earnings growth has averaged 10% over the last few years. A good proxy for this growth is the VanEck Vectors Africa Index ETF (NYSE: AFK), which tracks 50 large African companies in a variety of industries.
Risks To Consider: Emerging markets have inherently greater political and economic risks than established markets. Despite the dramatic improvement, political upheaval and economic dangers are very real on the African continent. In addition, both Donald Trump and Vladimir Putin are known to have volatile personalities. While things appear bullish between the United States and Russia, things could quickly revert to the old hostilities.
Action To Take: Look outside the box for emerging market investments. While the traditional names will likely be hurt by the pending U.S. economic changes, markets such as Africa and Russia should remain fertile ground for investment. ETFs provide investors diversification and access to a wide variety of emerging markets. iShares MSCI Russia (NYSE: ERUS) and VanEck Vectors Africa Index ETF (NYSE: AFK) are two examples of ETF's representing under-the-radar emerging markets.
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