By Tim Seymour
Why are we seeing "dirty laundry" in emerging markets this year vs. developed markets, which have soared? In the move down in emerging markets, there have been four distinct phases:
- Global growth questions
- Country-specific political and policy questions
- Current account and macro pressure coming from changes in monetary flows
- Tapering leading to actual reallocation of money away from emerging markets assets
Not all has been bad for emerging markets if you are a stock picker or follow momentum. For example, Chinese Internet stocks are soaring +50% this year, and some valuations still look interesting if you consider the delivery of revenues from mobile and search we are seeing from major players.
Other areas where stock pickers in emerging markets have made money are as follows:
Consumer Non-Cyclical and Consumer Cyclical
- Magnit Russia -- largest discount supermarket chain
- Aspen Pharmacare (OTCPK:APNHF) -- South African branded and generic pharma supplier
- Unilever Indonesia (OTCPK:UNLRF) -- consumer non-cyclical
- Cielo (OTCPK:CIOXY) -- electronic payment solutions (+25% in Brazil)
- MercadoLibre (NASDAQ:MELI) -- eBay meets Craiglist (+53% in Latin America)
- Embrear (NYSE:ERJ) -- airline manufacturer in Brazil
- COWAY -- air purifiers and water treatment
Things will get better, and the inflation growth tradeoff creates opportunities in bombed out places like Brazil and India. However, these areas will probably need to see more Fed unwinding.
- Brazil (NYSEARCA:EWZ) -- down 30% in USD terms and trades at 4.2% dividend yield
The trade right now is to bet on those companies that are well-positioned to see follow-through on European Union and global domestic market recoveries.
- JetBlue (NASDAQ:JBLU)
- KOC Holdings (OTCPK:KHOLY)
Overall, playing emerging markets with a time horizon of a couple of years seems opportunistic, especially based on multiples. The MSCI EM (MXEF) is 11.2x current 9.5x 2014 P/E. If you are playing the iShares MSCI Emerging Markets (NYSEARCA:EEM), $36.50 is the 18-month support on EEM, or 880 on the MXEF MSCI Index. If you want to play a lower volatility core emerging markets index that has outperformed the EEM, try iShares MSCI Emerging Markets Minimum Volatility (BATS:EEMV).