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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| April 2017
Studio Incendo via Flickr
You might not have noticed, but 2016 was a close race between U.S. stocks and emerging markets stocks, with the S&P 500 pulling out a slim margin of victory thanks to Donald Trump’s victory in the presidential election. The S&P 500 was up 12% in 2016, 70 basis points ahead of the MSCI Emerging Markets Index.
Still, consider this.
Latin America led the charge this past year, gaining 31.4%. The EMEA (Europe, Middle East, and Africa) came a distant second, but still improved 20.6% on the year. Country-wise, Brazil led all entrants delivering a blistering 66.7% return over the calendar year, and Russia finished a close second at 55.9%. Hot sectors in emerging markets included energy and materials, up 36.8% and 31.5%, respectively.
And while 2016 was fine, 2017 is looking even finer.
The BLDRS Emerging Markets 50 ADR Index (ADRE) is a 50-stock portfolio that tracks the performance of the BNY Mellon Emerging Markets 50 ADR Index. All of the holdings are ADRs trading on a U.S. stock exchange with an average market cap of $87.3 billion and an average P/E ratio of 18.2 — 310 basis points less than the S&P 500. And so far in 2017, that ETF is up more than 12%, scorching the S&P 500.
It’s time to jump on the bandwagon. These are the seven best emerging markets stocks to help you do just that.
Prices and data are from the original InvestorPlace story published on April 17, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Alibaba Group Holding Ltd — ADRE’s largest holding at more than 12% — needs no introduction.
China’s Alibaba is the country’s clear leader in e-commerce revenue. But Alibaba has so much more going on than just acting as the middleman for businesses and consumers. Its cloud business, while still losing money, is on the verge of becoming a huge profit generator just like Amazon.com, Inc. (AMZN), whose Amazon Web Services (AWS)business delivers almost all of Jeff Bezos’ profits.
Alibaba founder Jack Ma could be brothers with Bezos. They’re both brilliant and relentless business people. Like Amazon before it, I don’t think you need concern yourself with valuations. If you want to benefit from the emerging markets’ rise from the ashes (figuratively, not literally), you have to own BABA stock.
“On any given day, I tend to find at least one new, high-probability trading idea that’s almost immediately actionable.” wrote Serge Berger, Head Trader & Strategist at The Steady Trader on April 11 at InvestorPlace. “BABA’s current setup is one that qualifies as high-probability for a breakout trade toward $120.”
As a trade, or as a holding, it’s hard not to love Alibaba.
Sector: Consumer Staples
Femsa doesn’t necessarily offer one of the best dividends on the market — at just 1.5% — but it’s still one of my favorite Latin American stocks.
I recently discussed Fomento Economic Mexicano SAB as the smart way to play The Coca-Cola Co. (KO) because you get the growth in Latin America of both Coke and Heineken NV (HEINY) while also benefiting from its OXXO convenience store chain. FMX also owns more than 1,000 drug stores in Mexico and elsewhere.
Many of Latin America’s economies are starting to perk up — Brazil included — and that has the burgeoning middle class driving growth from all three of its main investments. As a result, Femsa’s free cash flow, which already exceeds its annual income, is only going to get better. That should lead to more Latin American acquisitions.
If you want to play a little defense with your emerging markets investments, FMX is a great way to buy without losing out on Latin America’s future growth.
Itau Unibanco Holding SA is Brazil’s largest private-sector bank with almost 100,000 employees in Brazil and other parts of the world. The bank itself is the product of a 2008 merger between Unibanco and Banco Itau. At the time of the merger, ITUB had $265 billion in assets; today, that’s up to $454 billion.
Like many financial institutions in South America, Itau Unibanco is controlled by two prominent Brazilian families. As the bank grows larger, this structure could change. But that’s not really a concern because ITUB is a very well-run bank.
Itau Unibanco sports a total of 5,103 branches worldwide, including 4,537 in Brazil, and it operates in many segments financial services industry, including insurance, credit cards, wealth management, and vehicle and mortgage loans.
In 2016, despite a 10.4% decline in its net income, it still managed to drive $6 billion to the bottom line — 8.6% higher than the $5.5 billion in 2014.
ITUB also yields a fat 4.7%, which is much higher than its U.S. counterparts, which throw off closer to 2%-3%.
Telekomunikasi Indones (Prsr)Tbk PT-ADR — or Telkom Indonesia for short — is 52.1%-owned by the Republic of Indonesia. Traded on the New York Stock Exchange since 1995, it operates the general telecom-related businesses such as mobile, fixed-line, internet, TV and more. In 2016, TLK made $2.2 billion on $8.8 billion in revenue; since 2012, the top and bottom lines have grown by 50.8% and 58.7%, respectively.
Telkom Indonesia’s 6.2% returns in 2017 have been enough to outperform the S&P 500 — something it has done over the past five years, by 236 basis points annually. More importantly, it has beaten Verizon Communications Inc. (VZ) and AT&T Inc. (T) by 667 basis points and 618 basis points per annum over the same period and is ahead of both of its American peers so far in 2017.
Indonesia’s GDP grew 4.9% in 2015, 5% in 2016, and is expected to grow 5.1% in 2017 and 5.3% in 2018 — slightly higher than the average for Southeast Asia. Reasonable and steady growth is always preferable to growth that blows hot and cold.
TLK should continue to benefit from this stability. Income investors won’t be interested in its yield of 0.5%, but as long as it continues to deliver above-average returns compared to the telecoms that are operating in the U.S. … what’s not to like?
Although I’m trying to diversify my stock picks by country as well as sector, I’ve elected to go with another Brazilian company, this time in the energy sector.
Ultrapar Participacoes SA, known as Ultrapar, operates five different businesses. That includes one of the largest drug store chains in Brazil, as well as Ipiranga, the second-largest fuel distributor in Brazil with 7,230 gas stations and a 22% market share as of 2015. It also is the largest distributor of propane gas in Brazil with a 23% market share (again, as of 2015).
Together, Ultrapar’s five segments had operating profits of $990.4 million in 2016 on $24.7 billion in revenue. Revenues and operating profits increased by 2.3% and 4.9% year-over-year, respectively. Ipiranga accounts for 85.8% of Ultrapar’s revenue, and 76.8% of its overall operating income.
Only its Extrafarma drug store chain failed to generate an operating profit in 2016. However, Ultrapar was busy growing the number of stores by 24% over the past year, which led to higher costs. On an EBITDA basis, Extrafarma made $11.8 million on $503.2 million in revenue.
That’s a lot of numbers to say something very simple: Brazil’s economy is slowly improving, and Ultrapar has gotten far out ahead of it. UGP will surely benefit in the months and years to come.
Despite the fact that Africa has a population of 1.2 billion, just 40 companies from the continent are listed on Wall Street.
South Africa-based Sasol Limited is one of them.
Sasol operates four businesses: Coal Mining, Oil and Gas Exploration and Production, Gas Stations and Chemicals. It has six coal mines that generate coal for electricity as well as exporting to other countries in Europe and Asia. Its oil and gas business operates in Mozambique, South Africa, Canada, Gabon and Australia.
As investors are aware here in North America, oil and gas businesses haven’t done very well in the past few years while oil prices have tanked. In 2016, Sasol’s oil and gas segment saw its revenues decline by 19%. Overall, Sasol’s four segments generated $12.5 billion in revenue in 2016, a 7% year over year decline, and operating profits declined by 48% to $1.8 billion.
However, SSL shares are relatively cheap with an earnings yield of 5.8% — 110 basis points less than the S&P 500. And considering that the stock is down more than half from its five-year high, any improvement in commodity prices will drop right to the bottom line, pushing Sasol higher.
This is the emerging markets value play of the bunch.
Sector: Consumer discretionary
Tata Motors Limited owns the Jaguar and Land Rover brands, although it makes cars under other brands and sells mainly in China and India.
In the first nine months of fiscal 2017, Tata’s net profit was $474 million on $29.4 billion in revenue. While revenues so far in 2017 are up 3.6% through Q3 2017 — with Jaguar Land Rover delivering an impressive 15.0% increase year-over-year — Tata Motors profits are down by 50.2%, primarily as a result of lower volumes and profit margins at Jaguar Land Rover.
In recent years, Tata Motors’ net margins have run between 4%-6%. In the trailing 12 months ended Dec. 31, 2016, they’re slightly lower at 3.3%, and that’s reflected in a single-digit return on invested capital — something it hasn’t had since 2009.
However, TTM is financially stable, boasting long-term debt that accounts for just about 20% of its total assets. It’s sure to move higher with future results that will deliver double-digit returns on invested capital. With the successful introduction of the Jaguar F-Pace luxury SUV, you can be sure that the volumes will trend higher in 2017.
Forget the North American car companies and go for one that’s based in India.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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