Emerging Market Stocks are Cheaper Relative to US Stocks

In a post yesterday I discussed about the elevated levels of US stocks. In today’s article let us take a look at how emerging stocks are cheaper compared to US stocks based on a recent research report.

From a research report by Charlie Wilson,Phd , Portfolio Manager at Thornburg Investment Management:

Despite the improvement in underlying earnings quality and the nascent recovery, the forward P/E multiple for the MSCI EM Index isn’t stretched. The 2018 earnings multiple of 11.4x (as of June 28, 2017) sits just above the 10-year average of 11.2x. This is hardly stretched relative to the history of the index or global equities in general. After five strong years of U.S. equity-performance, the MSCI EM Index remains at a large discount to the S&P 500 even after the recent recovery (the S&P 500 is valued at 18.7x currently)(Figure 8). That discount has continued to increase even during the recent emerging markets rally. As you can see, for a variety of reasons, the MSCI EM Index has room to run.

Source: Rally in Emerging Market Equities Peaking, or Just Beginning?, Thornburg Investment Management

Emerging stocks can be highly volatile but in the long-term they have yielded higher return than developed markets. In addition, though developing countries have smaller economies than many larger developed economies, the economic growth rate is higher in emerging than developed countries. So in order to profit from the growth opportunities it is wise to invest in emerging stocks.

Five stocks from emerging markets are listed below for further research:

1.Company: Banco de Chile (BCH)
Current Dividend Yield: 3.28%
Country: Chile

2.Company: Enel Generacion Chile SA (EOCC)
Current Dividend Yield: 7.74%
Sector:Electric Utilities
Country: Chile

3.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.24%
Sector: Oil, Gas & Consumable Fuels
Country: Brazil

4.Company: HDFC Bank Ltd (HDB)
Current Dividend Yield: 0.58%
Sector: Banking
Country: India

5.Company: PetroChina Co Ltd (PTR)
Current Dividend Yield: 1.42%
Sector: Oil & Gas
Country: China

Note: Dividend yields noted above are as of July 7, 2017. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

U.S. Stock Market Valuation Remains High At Current Levels

The U.S. stock market as measured by the S&P 500 has soared over 300% since the trough reached in March, 2009 at the peak of the Global Financial Crisis. The current bull market is one of the longest in history and valuations remain elevated according to an article by Manning & Napier Advisors. They predict that the US market has less upside potential moving forward.

The chart below shows the forward P/E ratio of S&P 500 from June 2007 thru June 2017:

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Source: July 2017 Perspective, Manning & Napier Advisors

So what should an investor do given the high valuations of US stocks?

While forecasting what the market will do in the future is especially difficult there are many things that an individual investor can do. For instance, instead of worrying about things beyond their control they can focus on things that are under their control. Listed below are some of the strategies an investor can consider:

  • Diversify across asset classes and regions/countries. No country’s market is the top market each year. So better to allocate assets across countries.
  • Certain sectors of the US market such as the tech sector are in bubble territory now. Investors may want to cautious of these sectors. The WSJ and other financial media is full of frontpage  articles how Silicon Valley companies are changing the world and how their growth is almost infinite.
  • Investors committing new money into the market may invest in phases by waiting for pullbacks and picking up stocks cheaper than investing in one shot.
  • This is not the time to be complacent and go with the crowd. Instead investors have to create a watchlist of stocks and wait for lower levels to deploy new capital.
  • Stay away from IPOs. Most of them are overpriced and end up losing money for retail investors.
  • Investors also have to be prepared for lower returns moving forward and also be ready for a correction in the equity markets. So this means if they are overweight in one sector or stock and have high unrealized gains, now may be the time to take some profits off the table and wait for opportunities.
  • Canadian market looks attractive at current levels compared to other developed markets. Hence investors can consider adding stocks from up north selectively.

Related ETF:

  • SPDR S&P500 ETF Trust (SPY)

Disclosure: No Positions

Why You Should Own Gold in a Well-Diversified Portfolio: Infographic

Gold is an important asset class to own in a diversified portfolio. Because of its low co-relation to other assets and other factors holding some gold protects a portfolio especially during downward market moves. Since gold does not produce income such as a dividend it does not mean one should avoid them. According to World Gold Council even holding a small percentage of assets in gold can be beneficial to a portfolio.

Some of the reasons for owning gold are shown in the infographic below:

Click to enlarge

Source: World Gold Council

Related ETF:

  • SPDR Gold Trust ETF (GLD)

Disclosure: No Positions

U.S. Interstate Highway System Map

President Dwight D. Eisenhower signed the National Interstate and Defense Highways Act on June 29, 1956. The act enabled the creation of the largest highway network connecting all the states of the country. The building of this massive network of roads was the largest public works project in history. The original plan for the system is shown in the map below:

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Via  @ Twitter

The interstate system covers over 47,800 miles today and is one of the major drivers of economic activity. The interstate has helped trade and commerce flow efficiently between destinations.

The one thing that is frustrating with this network is the toll. Today the interstate is seen as a money-maker by the states and so toll is required to use many of them. For example, it is literally impossible to go east to west on the interstate across the country without paying a toll. The worst among the states is the state of New York with atrocious tolls for crossing bridges, tunnels, etc. After paying all the tolls on the NY roads one may wonder if the term “highway robbery” has a new meaning in today’s world.

Products Comparison: Google, Amazon, Facebook and Apple

The following chart shows the various products offered by Google’s parent Alphabet(GOOG), Amazon(AMZN), Facebook(FB) and Apple(AAPL).Competition is fierce among these major tech companies. For example, in the payments field Google owns Android Pay while Apple has its own Apple Pay. Similarly in the hardware space, Amazon’s Alexa is the latest craze sweeping the country. Since getting off the couch and turning on the light switch so difficult for many of us, we can simply sit and ask Alexa to turn on the lights.

Click to enlarge

Source: Unknown

Disclosure: No Positions

Number of Publicly Listed German Companies Continue To Decline

The number of publicly listed companies continue to decline in many countries around the world. In earlier posts, I have discussed about the fall in public companies in the US and UK. The number of public companies listed continues to fall in Germany also as show in the chart below:

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Source: The Global Economy

According to latest exchange data, the total number of companies listed on the Frankfurt Stock Exchange is just 467.  Go to The Complete List of Listed Companies in Germany page to review all these firms. Listings peaked recently in 2007 at over 750 firms. Since then it has followed a downward trend to reach under 500 today.

This situation with German stocks is particularly noteworthy because Germany is the largest economy in Europe and is an export powerhouse. However most of the German firms are small to medium-sized firms that are in private hands. Many of these firms do not care to go public due to all the stress public companies have to face. In addition many Germans do not care about equity markets as the participation rate in equity investing is very low relative to other developed countries. All these factors tend to weigh in on public listings.