Published on October 12 2017

Our 20% Gain in Eight Months Is Just the Beginning

By Justin Spittler, editor, Casey Daily Dispatch

Earlier this year, I told you to “forget about U.S. stocks.”

I said this because I saw “more danger in U.S. stocks than opportunity.”

But here’s the thing. I didn’t tell you to hide in cash. Instead, I told you to buy emerging market stocks.

These are countries that are on the way to becoming developed countries like the United States and Germany. China, India, and Brazil are some of the biggest emerging markets.

I made this call because I saw a stampede of capital coming. I wrote on March 29:

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.

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• This wasn’t a popular opinion at the time…

Back then, most investors wanted nothing to do with emerging market stocks.

And why would they?

Emerging markets had been “dead money” for nearly a decade. You would have actually lost 0.2% of your money if you held the iShares MSCI Emerging Markets ETF (EEM), a popular emerging market stock fund, from 2007–2015.

Because of this, many investors gave up on emerging market stocks…

But I saw something most people didn’t see…signs of life.

You see, EEM rose 8% last year. That’s obviously not a huge gain. But it was EEM’s first positive annual return since 2012.

Not only that, emerging market stocks had just “broken out.” You can see this big move in the chart below, which I first shared in February.

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• Regular readers know why this is so important…

In short, stocks that break out of downtrends tend to keep rising.

That’s why I encouraged readers to buy emerging market stocks right then and there.

If you took my advice, congratulations.

EEM is up 20% since February. That’s double the S&P 500’s 9% return over the same period.

EEM is now trading at its highest level since 2011.

But don’t worry if you don’t own any emerging market stocks yet.

There’s still time to make a fortune on what PIMCO, one of the world’s biggest money managers, recently called “The Trade of the Decade.”

I’ll show you how at the end of this essay. But let me first tell you why this bull market’s just getting started…

• Emerging markets are the fastest-growing economies on the planet…

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%. That’s nearly double the 2.3% growth rate it projects for the U.S. economy.

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

This is great news for companies in these countries. It means they make more money.

But don’t just take my word for it.

• MSCI thinks these companies are going to make a lot more money, too…

MSCI is one of the world’s largest investment research companies.

And it expects earnings for companies in emerging markets to grow 21% this year. That’s double the 10% earnings growth rate it’s projected for U.S. companies.

• Mark Mobius also thinks this trend will continue

Mobius is the executive chairman of Templeton Emerging Markets Group. He’s spent the last 40 years analyzing emerging markets. At this point, he knows more about emerging market stocks than just about anyone on the planet.

And he thinks "we are still in the early innings of the emerging-market earnings growth upturn." Mobius wrote in August:

EM [emerging markets] corporate earnings growth hit an inflection point in 2016 after several years of decline, due in part to weaker commodity prices and slowing growth in China. Earnings growth now appears to be rebounding.

• Now, investors normally pay a premium for rapid earnings growth…

But emerging market stocks are 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 two popular valuation metrics: price-to-book (P/B) and price-to-earnings (P/E).

  EEM SPY Discount
P/B 1.79 3.23 45%
P/E 16.39 21.88 25%

Keep in mind, this bargain won’t last long. Pretty soon, everyday investors will realize the big money will be made in emerging markets, not U.S. stocks.

So pick up shares of emerging market stocks if you haven’t already. The easiest way to do this is with a fund like EEM or the Vanguard FTSE Emerging Markets ETF (VWO).

You could also bet on individual emerging markets. Just be sure to do your homework first. Not all emerging markets are created equal.

Regards,

Justin Spittler
New Orleans, Louisiana
October 12, 2017

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