For Retirement, Embrace Emerging Markets

by Neil George | November 30, 2010 12:56 pm

The past month has seen the mega markets do yet another round of the Slip-N-Slide. In the U.S., the Dow has given up 1%,  while in Europe  the latest rounds of credit disasters have driven the leading stocks from London to Paris and Frankfurt down more than 8%.

And yet, the usual talking heads of Wall Street — the brain trust of the nation’s wannabe retired — keep spooling out the same call to stick with the major market indexes. They need your dollars to keep flowing to the big markets to keep their own paychecks coming. Of course, there is a growing segment of guys now running to the forefront with calls of doom and gloom for the U.S. economy. These “contrarians” are mostly seeking their 15 minutes of fame and don’t really have much investing advice for you to protect your nest egg.

What if you could get beyond both the usual suspects of Wall Street and the alternative doom and gloomers? You might just then actually manage to make and keep a few more bucks for your own retirement.

Emerging Markets: Forget the Ratings

The key to making your own portfolio pay for your retirement is to focus on stocks that not only pay you to own them, but stocks in markets that aren’t facing the next round of credit or other crises. And if you can get those stocks in markets with currencies that are rising against the dollar, euro, pound and yen, it will make those dividends and gains even richer.

To do this you need to ditch what Wall Street keeps telling you is risky and instead embrace emerging markets. They’re called “emerging” for one reason: They’re making the right moves to grow their  economies and the stocks and currencies reflect their progress.

Look at it this way:  How many so-called AAA-rated economies have been slammed over the past few years? But instead of investing in AAA-rated markets that can only fall from grace, why not invest in markets that are the up-and-comers with rating on the rise? Asian counties such as Thailand are the climbers — with rating going from BA to the high-end of BAA. Or how about Singapore? It went from AA to AAA in just a few years.

In the Americas, there are markets that continue to be keenly focused on the goal of becoming the next major market. Brazil is the poster child for the cause and with the recent elections rewarding the right leadership, the nation has gone from the basket case of a single-B rating to BAA with the next step in the A-ratings.

And in Europe and just east, markets such as Turkey and Israel are picking up their ratings. Turkey has been moving from the lowest of B-ratings into the BA range and Israel keeps moving up the A range, while the leaders of the EU are heading south crushed by their loss of focus.

Profit,  Not Panderings

Markets don’t lie when it comes to what is real rather than just assumed. And this is where the emerging markets are delivering while the majors do their slip and slide.

In Asia, Thailand and Singapore are performing. Local market stock indexes are up so far this year by over 16% for Singapore stocks and nearly 50% for the Thai stocks.

Brazil is up a bit.  Israel is up over 16% while the Turks are up over 25%.

Then there is the currency factor. If you can get the right stocks in the right markets, you can make even more. And for markets that are on the upswing, currencies track their progress. Way back when I was a currency trader, I used to work with corporations and investors try to get a handle and not just guess about currency directions.

I came up with a fundamental model for valuing currencies that really just put a currency on the spot just as if it was the stock of the country. The better the fundamentals of a market, the better the value of currency denominating all of the market.

Better fundamentals results in better currencies. So while the U.S. dollar,  the euro, British pound and other majors reflect the underlying woes of their markets, the currencies of the up-and-comers are gaining.

In Asia just this year alone, Thailand’s baht is up almost 10% while Singapore’s dollar is up a bit less at a 5% gain.

Brazil’s real continues its rally against the majors despite some efforts to stem its long-term upward run.

Meanwhile, the Turkish lira and Israeli shekel are both climbers with gains against the dollar of 3% each and nearly 17% or more against the euro so far this year.

Better Markets, Better Retirements

I focus on stocks that will grow your retirement wealth during good times and bad. And one of the crucial means of making this happen is to focus on a few major tenets when it comes to picking stocks for your own retirement portfolio include focusing on stocks that pay solid high-paying dividends. And then if they can be found in rising markets with rising currencies, it’s all the better for the long haul.

There are plenty of quality high-paying dividend stocks in the best of the up-and-coming emerging markets. The key is not just to throw a dart at a good market — nor get stuck with just a broad index play in an ETF (exchange-traded fund) — as in either case you can get hosed hoping that your dart picked the right stock.  Or, you can just fester with an index or even lose out if the ETF doesn’t track the right collection of the right stocks.

The answer is to pick stocks that are in sustainable industries and then put them through the stress tests. Stress test No. 1 is to focus on the income statement and look at what happens when the worst hits their markets. If the cash keeps coming to service their dividends, then it has passed the first test.

Second, focus on the balance sheet. Look at the debt and what needs to happen to keep that debt serviced and rolled over. The interesting thing about many stocks in emerging markets is that they tend to have less debt than their peers in the so-called major markets.

You’ll find a collection of stocks that I’ve run through my own stress tests in the Pay Me Strategy, including a whole new series in some of my favorite emerging markets such as Thailand, Singapore, Brazil, Turkey, Israel and others. What links each of the newest of my vetted stocks is that they’re not only performing,  but they’re high-paying as well.

And they’re not hard to buy. In fact each and every one of them can be bought and owned in any U.S. brokerage account, including retirement accounts from IRAs to SEP and even many 401(k) and other qualified retirement accounts. And some even trade right in the open of the New York Stock Exchange (NYSE).

Want an example? How about in Brazil, where one of the nation’s major power utilities keeps pumping out the cash.

CPFL Energia
 (NYSE: CPL[1]) is based in the financial capital city of San Paulo and pays a dividend of over 8%. And for the last  five years, just as the U.S., Europe and Japan have almost imploded, CPFL Energia has delivered annualized average returns each and every year of over 27%.

Rising cash flows, fat and rising margins and low debt to assets all work to make this company’s stock make the cut. And why this is yet another of the collection of stocks in the Pay Me Strategy that might not get Wall Street hype,  but instead keeps working to pay for plenty of investor’s retirements. 

Neil George is editor of By George and The Pay Me Strategy[2].

  1. CPL:
  2. The Pay Me Strategy:

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