After years of underperformance, stocks in emerging markets might finally be set to beat the pants off the S&P 500, though it’s certainly been a long road to get here.
The iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) is still down by about a third from its pre-2008 highs. The credit and real estate crisis in America followed by a European sovereign debt crisis and a global commodities and energy bust all conspired to take the wind out of the sails of emerging markets stocks.
Yet over the past year, EEM is up about 25% — and this may be just the beginning.
When emerging markets stocks start a bull run, you had better watch out. EEM was up by more than 150% between late 2008 and mid-2011. And from 2003 to the onset of the crisis in 2008, EEM was up by a factor of five.
Today, we’re going to take a look at five emerging-market stocks to buy that should do extremely well in a good bull market. You probably shouldn’t bet the farm on any of these because, as I explained, with emerging markets you pretty well live by the sword or die by the sword. While emerging markets can make you wealthy in a bull market, they can ruin you in a good bear.
But a small, speculative bet in these best emerging markets stocks could still pay off in spades.
The Best Stocks to Buy in Emerging Markets: Cemex (CX)
Emerging Market: Mexico
I’ll start with Mexican cement giant Cemex SAB de CV (ADR) (NYSE:CX). If we’re building a wall along the border with Mexico — and having Mexico pay for it — what better stock to own than a Mexican cement company?
I’m joking, of course. But Cemex is an established player in the construction materials space that has had a really rough ride over the past decade. In 2007, Cemex traded for about $30 per share. As recently as last year, it traded for just $5. It has since rebounded to over $9, but this stock is trading about where it was in 2002 — fully 15 years ago.
At current prices, Cemex trades for about 1.2 times sales. As a point of comparison, Texas-based Eagle Materials, Inc. (NYSE:EXP) trades for 4.3 times sales.
Now, to be fair, Eagle Materials also has a lot less debt, less currency risk and is generally a less-risky play. But if you’re looking for play on a continued emerging-market rebound, Cemex is the way to go. It’s an EM stock that has been battered and essentially left for dead.
Any hint of an emerging markets rebound should send this stock a lot higher.
The Best Stocks to Buy in Emerging Markets: MTN Group (MTNOY)
Emerging Market: South Africa
An emerging markets stock that is far off the radar screen of most investors is South Africa’s MTN Group Ltd (ADR) (OTCMKTS:MTNOY). MTN is Africa’s leading mobile phone service provider and, in my opinion, one of the safest and most predictable ways to tap into the growth of Africa’s budding middle-class consumers.
While owning a car or basic appliances might have been a sign of “making it” to middle-class status in the past, I would argue that owning a basic smartphone holds that distinction today. You simply cannot function in the modern world without one.
Unlike a Western company that got adventurous and decided to plow into the wilds of Africa, MTN is an is a homegrown South African company with far more knowledge and experience in navigating some of the world’s most rugged and dangerous places. MTN goes places that most western telecom operators wouldn’t dare visit, including Yemen, Syria and Afghanistan.
For American investors, the biggest problem in owning MTN in recent years has been the weakness of the South African rand. Rand weakness is a big reason why the stock is down by more than half since late 2015.
But if you believe, as I do, that Africa is the next major growth story, then MTNOY is one of the best emerging market stocks in the world. As African consumers work their way into the middle class, MTN will be one of the first companies to take their hard-earned cash.
And today, the stock yields a nice 3.6%, so you’re getting paid to wait for this story to play out.
The Best Stocks to Buy in Emerging Markets: Turkcell (TKC)
Emerging Market: Turkey
Along the same lines, the intrepid investor might consider shares of Turkish mobile leader Turkcell Iletisim Hizmetleri A.S. (ADR) (NYSE:TKC), or just Turkcell for short.
Turkey has been a treacherous place to invest in recent years, as many of the pro-Western reforms of the past century unfortunately seem to be going into reverse. Particularly scary was the recent crackdown on government dissent that saw thousands of police officers, judges and government officials jailed or removed from their positions. Turkey also happens to share a border with Syria and finds itself smack-dab in the middle of the ugliest regional conflict in recent memory.
Turkey is not an investment destination for the faint of heart.
But as the legendary Baron Rothschild allegedly said, “The time to buy is when there is blood in the streets.” If you feel like making a bold contrarian bet, Turkey is an obvious choice. And Turkcell, as one of Turkey’s finest blue chips, is probably the safest way to play a Turkish turnaround.
TKC was a $30 stock in late 2007. Today, it fetches roughly $7.50 per share and trades for about 10 times earnings. A fair amount of that weakness is due to currency depreciation, which Turkey has struggled with for decades.
Turkey will likely be a mess for a long time to come. But to make money in a market like this, you don’t necessarily have to wait for things to be peachy. They simply have to stop getting worse.
It’s debatable as to whether Turkey has reached that inflection point … but I think this emerging markets country is probably close.
The Best Stocks to Buy in Emerging Markets: Ambev (ABEV)
Emerging Market: Brazil
Few emerging markets have gotten beaten up as badly as Brazil in recent years. It seems like in the early 2000s, nothing could go wrong for Brazil. A commodities boom provided a windfall of tax revenue, which the government used to boost welfare payments to poorer families … boosting consumer spending and creating a virtuous cycle of growth.
Alas, it all went into reverse in 2008. The commodities boom came screeching to a halt, which put pressure on government finances. And then, an enormous kickback scandal involving Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) engulfed the government and led to the impeachment and removal of President Dilma Rousseff. Along the way, the iShares MSCI Brazil ETF (NYSEARCA:EWZ) lost about 80% of its value peak to trough.
But then, something funny happened. Brazilian stocks hit bottom and started to rally again, with EWZ roughly doubling over the past year.
If you think Brazil is just getting started, a relatively conservative way to play it would be via the shares of beer giant Ambev SA (ADR) (NYSE:ABEV), which is a formerly independent subsidiary of Anheuser Busch Inbev SA NV (ADR) (NYSE:BUD).
Beer earnings tend to be more stable than commodity companies or banks, which tend to make up most of Brazil’s market cap. So in ABEV, you get one of the best stocks if you’re risk-averse — most of the upside from a bull market, but you’re taking less of a chance.
The Best Stocks to Buy in Emerging Markets: VanEck Vectors Russia ETF (RSX)
Emerging Market: Russia
For our last pick, let’s roll the dice with the Market Vector Russia ETF Trust (NYSEARCA:RSX).
I should start this with a major caveat: I would not recommend putting any serious money into Russia. Given this country’s history, you would be a fool to put a significant chunk of your net worth into Russia.
But given the cheapness of the market, the thawing political climate and the fact that Russian stocks are showing momentum right now, I think Russia is worth a trade.
The Russian market trades for about 8 times earnings right now. Of course, cheap stocks are often cheap for a reason. Russia’s economy is hobbled by sanctions and extremely dependent on energy exports. That’s been a toxic combination for years. But with energy prices holding relatively steady and with the Trump administration likely to loosen sanctions, the worst is likely behind Russian stocks.
RSX — which holds the likes of Sberbank of Russia (OTCMKTS:SBRCY) and Gazprom PAO (ADR) (OTCMKTS:OGZPY) — is up by about 50% over the past year. But it’s sitting at barely a third of its pre-2008 price, so it’s reasonable to say we haven’t missed the move.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he did not hold a position in any of the aforementioned securities.