As we reach the end of the first quarter, Tesla Motors (TSLA) is leading the pack with a massive 48% gain, followed by Emerge Energy Services LP (EMES) at 27%. Not too shabby given that the S&P 500 is barely positive on the year.
My pick for 2014 — South African mobile phone giant MTN Group (MTNOY) — is off to a slower start, down about 2%. But with nine months left in 2014, I expect MTNOY stock to make a serious run for the top spot. And in fact, in the month of March, it has been the second-best-performing stock in the contest after EMES.
This year has been a rough one for emerging markets. First, there was the “mini-crisis” in the Argentine peso and waves of protests sweeping Venezuela. Then, there was the Ukraine political crisis that resulted in Russia effectively stealing the Crimean peninsula … and fears that China was about to have a “Lehman moment” that would see its capital markets collapse.
And finally, in the most bizarre of the lot, there is the corruption scandal engulfing Turkish Prime Minister Recep Tayyip Erdogan, in which Erdogan responded to his attackers by threatening to “eradicate” Twitter (TWTR), Facebook (FB) and YouTube.
MTNOY’s home country wasn’t immune either. South Africa is in the midst of an election season that has seen President Zuma raked over the coals for using excessive public funds to upgrade his personal residence. The African National Congress is facing its most difficult election in the post-Apartheid era.
Yet an interesting thing happened. While the news stories have gone from bad to worse, most emerging markets have been quietly enjoying a rally since early February. The iShares MSCI Emerging Markets ETF (EEM) is up about 7%, and the iShares MSCI South Africa ETF (EZA) is up fully 17%.
So, what gives? Did the problems plaguing emerging markets — unsustainable current account deficits, unstable governments, weak domestic demand, etc. — spontaneously resolve themselves?
Not exactly. A more reasonable explanation is that the selling simply exhausted itself and that the bad news has already been priced in. Fund outflows from emerging markets are at their highest levels since the 2008 crisis.
As an asset class, emerging markets are cheap and underowned and, for the most part, still completely despised by the investing public — making them a virtual textbook example of the perfect contrarian investment opportunity.
I believe that emerging markets are the single best asset class for the remainder of 2014. And as a leading mobile carrier in Africa — one of the fastest-growing regions in the world — MTN Group is in excellent position to ride that wave.
Let’s review the bullish arguments for MTNOY:
- It’s the dominant mobile provider in the last great frontier market: Africa.
- It provides a service that is essential to the lives of the new African middle classes.
- Its markets are far from saturated, and it has virtually unlimited growth potential due to the inevitable shift to smartphones and higher-margin data plans; only about a third of MTN’s subscribers currently use data
- It’s very reasonably priced and pays a high and growing dividend; MTNOY stock has a dividend yield of 4.8%
- MTNOY stock trades at a reasonable price/earnings ratio of 14
If you haven’t picked up MTNOY stock yet, it’s not too late. Though it has rallied off its recent lows, I believe we are still in the early stages of a multi-year rally in emerging market stocks.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long EZA and MTNOY. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.