“In the land of the blind, the one-eyed man is king.”
This centuries-old idiom, while apropos in many scenarios, reflects the conundrum of the modern-day stock market investor looking for growth in a world with very little to be found. With so few sure-thing investments, a “one-eyed man” is harder than ever to come by.
Of course, there are some obvious places to look for a seer right here in the U.S. But the few growth pockets with promise – such as Amazon.com Inc. (AMZN) – were revealed long ago, both by Wall Street and the average investor.
And is it really worth paying that incredible multiple for growth? Especially with so many investors hot on the scent of any profit?
U.S. stocks, as a whole, are expensive and dramatically unstable. Valuations are in the 90th percentile currently – reaching historic levels.
It’ll take one hell of a cyclops to see a bright spot in this murky forecast.
Right now, without a clear line of sight to profit in the U.S. market, its time to follow in the footsteps of the legendary Sir John Templeton and scour the globe for bargains.
Sir John told investors to “buy when others are despondently selling and sell when others are avidly buying.” With the TINA (there-is-no-alternative to U.S. stocks) trade in full force, buyers are snatching up domestic shares in a frenzy.
He added, “People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable?”
And right now overseas markets, in general, look miserable. A number of them are in bear market territory, down 20% or more.
This means that valuations should be dirt cheap. And they are, particularly in the emerging world.
Sir John would describe emerging stock markets as “miserable.” Over the past 52 weeks, emerging markets (EM) have plunged by nearly 22%.
Since 2010, EM stocks have averaged a 6% annual decline. In comparison to a 10% average annual gain for the S&P 500 Index, those numbers are pretty bleak.
Such a sharp contrast in fortunes hasn’t happened since the U.S. tech stock boom that led to the Nasdaq bubble-and-burst.
Emerging market stock valuations are still very near levels last seen in the 1997-98 Asian Financial Crisis. Back in November, the average price/earnings ratio for EM stocks hit 12.8 times 10-year average earnings and the prior nadir was at 13.5 times in 1997-98. Its long-term average is 25 times earnings.
In addition, many stocks in emerging markets now sell at below book value. Comparatively, U.S. stocks trade at nearly three times book value.
How to Invest in EMs
Investing in these markets is not easy, even for someone like myself, who has been in the industry since the 80s.
Index funds are nearly worthless – not to mention they’re a surefire aim-and-miss because indices severely restrict the investable stock universe to the most over-owned and over-valued stocks.
The Institute of International Finance gives the details. It points out that only $7.5 trillion out of a total $24.7 trillion in emerging market equities are covered by indices from MSCI and JPMorgan.
The rest are simply ignored, as if they don’t exist. Yet, it is in those ignored stocks – not included in the indexes – where the best bargains usually lie.
But in order to find these sleeper hits, it’s necessary to consult active fund managers.
Where to Invest
My suggestions for getting a foothold in international emerging market investments, filtered to represent options that are within reach of the average retail investor, are as follows…
For a taste of emerging markets, in general, take a look at the Scout Emerging Markets Fund (SEMFX). It has 46% of its portfolio in Asia, 21% in Europe, and 16% in Latin America.
For investments in specific regions there are a number of potential options, with the exception of Latin America where, sadly, none of the funds met recommendation quality criteria.
For an investment in Africa, there is the Nile Africa Frontier and Emerging Fund (NAFAX).
Asia, however, has the most promising EM, of all. For the average investor, the best way to get a foot in the door is with Matthews Emerging Asia Fund (MEASX). Matthews is a strong option for someone interested in getting involved with the markets in China, India, and the rest of the Asian continent.
All of these funds can be bought through the Schwab Mutual Fund marketplace for a mere initial minimum of $100. Schwab requires $1,000 to open an account, but there is a way around that. With a pledge to deposit at least $100 monthly, it’s easy to begin investing in emerging markets with Schwab, even without a large initial investment.
As described by my colleague, Carl Delfeld, frontier-markets are a great place to find growth. And their valuations are largely uncorrelated to those of the U.S. market.
Delfeld’s investment suggestion is exceptional and tremendously promising. But it requires a $50,000 investment for U.S. investors. For those with a smaller cash pile to endow, a comparative and much cheaper alternative is the Wasatch Frontier Emerging Small Countries Fund (WAFMX).
This is only available directly through Wasatch. There is a $2,000 initial minimum with Wasatch, unless you set up an automatic monthly investment plan. Then the initial minimum is only $1,000.
There is, however, one caveat – Wasatch’s superb fund manager, Laura Geritz, is leaving at the end of June. From there, I will certainly be watching to see where she goes in order to invest with her again in the future. As for Wasatch, with her years of excellent guidance, I am confident that they will remain an outlet for sound investments, as well.
Slowly accumulating positions in these funds promises to be a less stressful and more profitable investment route. While others are chasing the TINA trade, emerging markets will lead to solid profits in the months and years ahead.