Emerging Markets Are a Screaming Buy

 | Jul 15, 2014 | 9:00 AM EDT
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As I was watching the World Cup final over the weekend, I noticed Dilma Rousseff, the President of Brazil, up in the luxury box with the other world leaders. I couldn't help but think about how doomed she is, given the massive amount of money spent on World Cup infrastructure, and the people it has displaced, amidst this backdrop of staggering inequality. Then the team was humiliated.

I own iShares MSCI Brazil Index (EWZ). I've owned it for a while, on the premise that Dilma was probably going to be gone, and that whoever replaced her was going to be better. When I bought EWZ, that was a remote possibility. Now, it is looking very likely.

Keep in mind that the politics in Brazil are very far left, and even the conservative candidates are well to the left of the Democrats here in the U.S. Rousseff is essentially a small communist, and she has governed like one. The opposition candidates in Brazil are much more predisposed to free markets. If you know the history of Brazil, you know the potential that this country has.

Likewise, in Argentina, Cristina Kirchner will be gone next year and the three candidates vying to replace her are right-wing reformers. The stock market has been on an absolute tear. I own an Argentine bank, BBVA Banco Frances (BFR). It has been my best trade. Argentina has been so poorly governed that it was kicked out of the emerging-markets index -- it is now considered to be a frontier-market country. It is near the bottom of the world rankings of economic freedom every year. This is a country with an educated population and vast natural resources, which was once one of the richest countries in the world. The potential for growth is astounding.

Meanwhile, you may have heard about what is going on in India. Narendra Modi is the new president -- and he is an unrepentant right-wing reformer. He governed Gujarat province for 12 years. Its rate of economic growth was astounding. Modi is not known as a charismatic guy -- he was elected because people thought that he'd be able to perform the same economic miracle across the entire country. I believe he can. There have been tensions around Modi because he is a staunch Hindu nationalist in a diverse country, but we are starting to learn that many Muslims voted for him, too. They want to be able to participate in the growth.

Finally, I have not studied Indonesia as much, but Joko Widodo appears poised to win there, and he's another economic reformer.

Six to eight months ago, emerging markets were considered uninvestable. The BRIC bloc -- Brazil, Russia, India and China? They were done. Brazil? A basket case. India? The License Raj. Russia? Well, it was invading Crimea. China? You name it, people hate it. I was pounding the table pretty hard, and putting my own money to work, buying EWZ, Market Vector Russia ETF Trust (RSX) and parts of Argentina. I would buy India right now if I had any spare capital.

Why was I so bullish on emerging markets? Because emerging markets have no debt. Carmen Reinhart and Kenneth Rogoff are right, and will be vindicated eventually. High levels of debt impede growth. The trend -- the long-term, 20-year trend -- is of emerging markets outperforming developed ones. The short period of developed-market outperformance was a countertrend rally. It has ended.

I don't much like iShares MSCI Emerging Markets Index (EEM), or Vanguard FTSE Emerging Markets (VWO), because it is harder to generalize about emerging markets as an asset class. Also, besides, some of the biggest, most successful companies in the world come from emerging markets. If I didn't have the ability to pick individual countries, I'd be very comfortable plunking down money in an emerging-markets ETF.

These countries have problems, for sure, but they are not intractable, as they are in the U.S. Brazil's central bank is willing to raise interest rates. India is willing to cut debt. They are hacking away at these problems, and we aren't even trying. We somehow think that, because European Central Bank President Mario Draghi "fixed" the debt problem by credibly threatening to print unlimited amounts of money, we can do whatever we want.

No. It will catch up with us, eventually.



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