In the past couple of months, emerging market stocks and bonds have been hit hard by a variety of concerns that range from protests in Brazil and Egypt, to strength in the U.S. dollar, weakness in commodities, disappointing economic data in China, and more. There has also been a decline in the bond market which has negatively impacted many dividend stocks and other assets that provide yield. However, the selloff in some names appears overdone as does the level of negativity towards emerging market assets (both bonds and stocks).
Patient investors who take a longer term view of the markets should use the volatility and short-term pullbacks as buying opportunities. Even as emerging market countries face infrastructure demands, inflation, and other issues, the fact is that this sector should be in a secular growth phase for the foreseeable future. Rising incomes and population growth in many emerging market countries is likely to provide the type of investment opportunity that was seen during the 1950's in the United States. Because of this, it makes sense to consider the recent pullback in these two emerging market picks as buying opportunities:
DWS Global High Income Fund, Inc. (LBF) is a closed end fund or "CEF" that focuses on investing in higher yielding bonds around the world. This fund has an experienced portfolio manager and it is a Deutsche Asset Management product. As investors have seemingly been dumping bonds of all types, this CEF has also seen a drop in the share price. However, it now appears to be offering investors a solid buying opportunity to pick up a yield of over 7%, with monthly dividend payments and an investment with significant rebound potential. Take a look at the chart below and you can see it is clearly oversold with a drop from about $9 per share to just around $8, in a short time.
The portfolio is comprised of: corporate bonds 46%, U.S. Government/agency 20%, other bonds 20%, loan participations and assignments 11%, non-security assets 1%, and cash equivalents are at 2%. This diversification reduces risks for investors. In terms of geographical distribution, the holdings are invested as follows: 22% United States, 10% Brazil, 8% Russia, 6% Luxembourg, 5% Uruguay, 4% Venezuela, 4% Canada, and 41% other countries. This diversification across the globe also minimizes risks for shareholders. This fund has an average duration of about 8 years and holds about 219 positions. Because it has shorter duration bonds, the downside risk of interest rate moves is relatively low when compared to long term bonds. In addition, it has a strong track record with average annual returns of 9.89% for the past ten years. It has also received a 4 star rating from Morningstar based on risk adjusted performance for the past 3 years.
While a CEF that invests in bonds globally has risks that include foreign exchange rates, liquidity and leverage risks, interest rate risks, and economic risks, the upside is considerable and investors who have accepted some of these risks have done very well over time. The downside risks now appear to be limited since this CEF is at undervalued levels. It now trades at a major 12.5% discount to net asset value, or "NAV" which is $9.16 per share (as of July 16, 2013).
This fund pays a monthly dividend of 4.6 cents per share which yields just over 7%. It is also worth noting that the monthly payout has been increasing over the past year. For example, in August of 2012, the monthly payout was 4.2 cents per share, but it rose to 4.4 cents in late 2012, then again to 4.5 cents and again to the current 4.6 cents per share. It could continue to rise in the future as the fund has recently been generating income of 4.72 cents per share on a monthly basis. The next dividend of 4.6 cents will be paid on July 31, to shareholders of record as of July 22. So, investors who buy soon will be able to collect the next dividend payment.
In the short term, this CEF could rebound to somewhere between $8.40 to $8.60 per share which is right around the 50-day and 200-day moving average, but the longer term potential is even greater as shareholders will be rewarded on a monthly basis with a generous yield. It's worth noting that many emerging market countries have much lower debt to GDP levels when compared to the United States and other "Western" countries and this is another reason why it makes sense to have some exposure to a CEF like this one.
Here are some key points for LBF:
- Current share price: $8
- The 52 week range is $7.52 to $9.27
- Earnings estimates for 2013: n/a
- Earnings estimates for 2014: n/a
- Annual dividend: about 4.6 cents per month, which yields 7.05%
Vale S.A. (VALE) is one of the world's largest metals and mining companies and it is based in Brazil. This resource-rich company produces iron ore, pellets, nickel, manganese, copper, aluminum, bauxite, potash and other commodities. Many of these metals saw a price surge before the 2008 financial crisis began. However, it has been a tough ride ever since, but the worst could be over and investors who buy now could be well-positioned for the next big cycle in commodities.
By taking a look at the chart above, it is easy to see how far the shares have dropped from about $21, earlier this year, to just over $13, recently. However, it is also important to notice that the stock has started a meaningful rebound from recent lows. This stock has been hit with a lot of bad macro news such as growth concerns in China (which is one of the largest consumers of iron ore), so to see it showing strength now could be a sign that it has reached rock bottom levels. If the rebound momentum continues, this stock could be headed back to key support levels which is the 50-day moving average at around $14, and even further to the 200-day moving average which, is roughly $17 per share. That could be the short-term potential, but more patient investors could be looking at even bigger gains since this stock appears dirt cheap.
Investors might be taking an overly bearish view on iron ore. Better than expected iron ore production results from Rio Tinto (RIO), caused that stock to surge about 4% on July 16th. A recent report from Bank of America (BAC) and Merrill Lynch was detailed in a July 4, 2013, article which also takes an increasingly bullish view on iron ore, it states:
"According to BofA, China steel mills appear to have destocked iron faster this year than last, perhaps influenced by tighter credit conditions.
Industry estimates suggest iron ore days inventories at steel mills are around 24 days compared to 32 this time a year ago, which could drive a near term re-stock."
If improved supply and demand ratios continue, iron ore prices might increase in the coming quarters which could significantly boost financial results for Vale. However, even with iron ore prices at current levels, analysts expect this company to produce solid profits with earnings of more than $2 per share in 2013 and for 2014 as well. That puts the price to earnings ratio below 7 times, which is very cheap considering that the S&P 500 Index (SPY) trades for about twice that level. This also looks undervalued based on book value which is $14.62 per share.
Investors who buy this cheap stock could be poised for solid upside potential as analysts at Goldman Sachs have issued a price target of $29.30 for Vale. In the meanwhile, a 75 cent per share dividend provides shareholders with a yield of nearly 6%. With earnings expected to come in at over $2 per share, that means the dividend payout ratio is low at just around 35%. It could also mean there is room for dividend increases in the future as profits grow with a rebound in iron ore. While downside risks can be considerable in the mining industry due to geopolitics, economic downturns, weather and safety issues, a lot of bad news already appears to be priced into this cheap stock and that could minimize the downside, while leaving substantial upside.
Here are some key points for VALE:
- Current share price: $13.94
- The 52 week range is $12.39 to $21.88
- Earnings estimates for 2013: $2.14
- Earnings estimates for 2014: $2.02
- Annual dividend: about 75 cents per share which yields nearly 6%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.