Published March 29, 2017

How to Make a Fortune Off the “Trade of the Decade”

By Justin Spittler

Forget about U.S. stocks.

I might catch flak for saying this. In fact, I wouldn’t be surprised if a few readers write to call me a “traitor.”

But my job isn’t to tell readers what they want to hear. It’s to help them make money and keep it.

And right now, I see more danger in U.S. stocks than opportunity.

Think about it.

U.S. stocks have been rising for eight straight years. This makes this the second longest bull market in U.S. history.

The S&P 500 has climbed 249% over that period.

Sure, U.S. stocks could climb another 5%…10%…or even 15% from here. But let’s face it—the big money has already been made, and I’m not interested in small money.

The good news is that there are plenty of other ways to make money.

And right now, emerging markets are one of my favorite opportunities…

• Emerging markets are countries on their way to becoming “developed” like the U.S. or Germany…

Brazil, Russia, India, and China (known as the "BRICs") are some of the world's biggest emerging markets.

More than 80% of the world’s population lives in the “emerging world.” Since 2008, these economies have accounted for 80% of the growth in global economic trade and output.

You would think this would make them great investments. But emerging market stocks have basically done nothing since 2010…until recently, that is.

Take a look at the chart below. It shows the performance of the iShares MSCI Emerging Markets ETF (EEM) since the start of 2015. EEM is the world’s biggest emerging markets fund. It invests in stocks across more than 18 emerging markets.

You can see it’s up 14% since the start of the year. That’s almost triple the S&P 500’s 5% return over the same period.

• More importantly, EEM has surged 41% since January 2016…

It’s now trading at its highest level since June 2015.

After a run like that, you might think that you missed the boat on emerging market stocks. But here's the thing…

Emerging market stocks could be the “Trade of the Decade.”

That’s a bold prediction. I know. But I didn’t make it. Pacific Investment Management Company (PIMCO) did.

• PIMCO is one of the world’s biggest money managers…

It oversees $1.5 trillion.

In February 2016, PIMCO called emerging market stocks “the trade of the decade.”

The giant money manager said this because emerging market stocks were an “enormous bargain.” They were trading at a cyclically adjusted price-to-earnings (CAPE) ratio of 10 at the time. For perspective, the S&P 500 is currently trading at a CAPE ratio of 29.

[CAPE is the cousin of the popular price-to-earnings (P/E) ratio. The only difference is that it uses 10 years’ worth of earnings instead of one. Like the P/E ratio, a low CAPE ratio means stocks are cheap.]

According to Bloomberg Markets, emerging market stocks have only been this cheap six times in the last 25 years. Whenever they became this cheap, they went on to rise an average of 188% over the next five years.

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• In other words, emerging market stocks were a screaming buy at the beginning of last year…

So, PIMCO did what any smart investor would do. It loaded up on them.

According to Bloomberg, two large PIMCO funds moved more than a third of their money into emerging market stocks.

That bet has paid off big time. But don’t worry if you didn’t buy emerging market stocks a year ago.

PIMCO thinks emerging market stocks are in the early innings of a multi-year bull market. So there’s still time to make a fortune.

I’ll show you how to do this in a second. But let’s first look at why emerging market stocks are such a good bet.

• They're still cheap…

Just look at the table below.

It compares EEM with the SPDR S&P 500 ETF (SPY), which tracks companies in the S&P 500.

You can see that emerging market stocks are much cheaper than U.S. stocks according to three popular valuation metrics: price-to-book (P/B), price-to-earnings (P/E), and enterprise value-to-sales (EV/S).

  P/B P/E EV/S
EEM 1.67 15.75 1.74
S&P 500 3.10 21.74 2.39
Discount 46% 28% 27%

• Based on this table, emerging market stocks look like a no-brainer…

But keep in mind that the U.S. is the biggest and most stable economy on the planet. It seems safe. And investors pay a premium for safety.

Emerging markets, on the other hand, come with a lot more baggage.

China, for example, is a communist country. Brazil, another huge emerging market, has had five currency crises in the last eight decades.

In short, emerging markets are riskier than the United States. That’s why their stocks are normally cheaper than U.S. stocks.

But here’s the thing. I think emerging market stocks are well worth the “risk” right now. Here’s why…

• Emerging markets have some of the world’s fastest-growing economies…

According to the International Monetary Fund (IMF), emerging markets grew 4.1% last year. For perspective, the U.S. economy grew 1.6%.

This year, the IMF expects emerging markets to grow 4.5%. It expects the U.S. economy to grow 2.3%.

For 2018, the IMF projects that emerging markets will grow 4.8%, compared to 2% for the U.S. economy.

In other words, emerging market stocks are cheap AND offer more growth potential. This is what every investor looks for.

So why is no one talking about them?

• Emerging market stocks have been a “dead money” trade…

Just look at the chart below.

You can see that emerging markets went nowhere between 2007 and 2015. You would have actually lost about 0.15% of your money if you held EEM over this period, and that includes dividends.

Because of this, many investors stopped caring about emerging market stocks. They became a forgotten asset class.

But that could change very soon.

If emerging market stocks keep rallying, you’ll soon be reading about them on the front page of The Wall Street Journal and Barron’s.

Pretty soon, mom and pop investors are going to want a piece of the action. They’re going to call up their brokers and say “put me in emerging market stocks.”

• We want to own emerging market stocks long before this mad rush begins…

To get ahead of the crowd, I recommend checking out shares of EEM today.

If I’m right about emerging market stocks, you could easily double your money in the coming years.

Just remember that there are no sure things when it comes to investing. So please use discipline if you buy emerging market stocks.

I’ll have more to say about emerging markets in the coming weeks.

Stay tuned...

Regards,

Justin Spittler
Delray Beach, Florida
March 29, 2017

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