Investors have stampeded the exits in everything emerging over the last week as Argentina and Turkey let their currencies plunge and the markets watch for contagion. Currency devaluations across the board are going to lead to higher inflation and force central banks to increase rates, choking off growth. The pain may be far from over but is also leading to an opportunity to invest in the strongest markets and companies that could rebound.
Diversify across regions and sectors
As with everything investing, you need to diversify across a range of factors. This is extremely important with emerging market investing as regional risks often trump company fundamentals. Latin America is possibly the weakest of the group with Argentina already devaluing by more than 12% and Brazil on the cusp of a credit downgrade. The Middle East and North Africa (MENA) has come under pressure on political turmoil as the Arab Spring of 2010 has yet to resolve. Asia, ex-India, looks to be the strongest and most stable with continued Chinese growth and spillover effects from a rebounding Japan.
If you are going to invest in Latin America, it better be in Chile and one of the strongest picks is Banco Santander Chile (NYSE:BSAC). Chile's financial system is dominated by the eight largest banks which control 84% of the deposits. Banco Santander is the second largest bank by lending share and the third largest in terms of deposit, helping to drive scale advantages and returns. Non-performing loans have remained stable over the last two quarters at just 2.9% of the bank's total loan portfolio. The shares pay a 3.2% dividend yield and trade for 12.1 times trailing earnings.
The country is relatively safe with inflation of just 3% and economic growth of 4.7% over the last year. Chile has been extremely fiscally responsible with its commodities windfall and had over $15 billion set aside in an economic stabilization fund. Marginally higher inflation will improve net interest margin for banks and loan growth has not been to the excesses seen in other regional peers.
It is impossible to talk emerging markets without talking about China, though you might argue that the world's second largest economy may not be "emerging" in the sense of other markets. Emerging or not, GDP growth of roughly $618 billion a year drives a lot of demand. CNOOC (NYSE:CEO) is well positioned to benefit from the demand growth in energy and has a competitive advantage in exclusivity rights in partnering with foreign companies on offshore production.
Investor sentiment has turned markedly against the company on a lowered 2014 output target off of two years of missed production goals. The company is still expected to see 6% revenue growth this year and trades at just 6.3 times trailing earnings. Investors earn a 3.6% dividend yield while they wait for valuation to come up.
Russia has been one of my least favorite emerging markets for several years but it is relatively safe from the chaos we are seeing lately in other markets. Mobile Telesystems OJSC (NYSE:MBT) is a leader in the country and across the commonwealth states it serves, as well as one of the largest carriers in the world with more than 100 million subscribers. Though cellphone penetration in Russia is over 160%, broadband penetration is less than 60% which gives the company a scope advantage with its broadband, voice and cable service.
Revenue growth is fairly stable between 4% and 5% and shares trade at a reasonable 6.6 times trailing earnings. The company's profit margin of 19% is well above U.S. peers like AT&T (NYSE:T) with a margin of 14% and Verizon Communications (NYSE:VZ) with a margin of 2%. Shares of Mobile Telesystems pay a 4.5% dividend yield and are near their 52-week lows.
With the bloodbath over the last couple of weeks, investors need to start thinking about being greedy while the rest of the market is fearful. I doubt that the selloff has run its course completely but investors should consider staggering into the best names and not worry too much about picking a bottom. Look for relatively stable regions and stocks with a competitive advantage in their sector. High dividend yields in many of these names can provide decent returns while you wait for a longer-term rebound.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.