Why Emerging Markets are the Next Hot Pick

Back in August 1997, I found myself on an old Russian military helicopter flying from Almaty, Kazakhstan, over Lake Issyk Kul, on the first ever investor trip to Kyrgyzstan.

It was at the height of the emerging markets boom. Brokers were flying London portfolio managers literally to the ends of the earth, showing us the latest and greatest opportunities on the investment frontier.

It was just as we landed back in Almaty that we had heard that Princess Diana had been killed in a Paris car crash.

As off-the-wall as that trip sounds, there will again come a time when emerging markets will attract the same manic attention of foreign investors.

And as always, fortunes will be both made and lost.

Just two months ago, investors were fleeing emerging markets amid fears about the “Fragile Five” — Turkey, Brazil, India, Indonesia and South Africa. Central banks scrambled to prop up shaky currencies after political and economic concerns led to investors abandoning these markets. And I was writing about why I thought that this emerging markets crisis was a red herring.

Fast forward to today and the “Fragile Five” are some of the best-performing stock markets in the world. In the past month alone, Turkey soared 22.63%, Brazil jumped 20.81% and India rose 9.51%. In addition, Indonesia is up 20.04% for the year.

Contrast that with the fate of investors in the high-flying biotech sector. Since peaking on Feb. 24, the Nasdaq biotech index has tumbled 21.8% and it just dropped below its 200-day moving average.

What Emerging Markets and Biotech Tech Stocks Have in Common

Biotech and emerging market stocks have a lot in common.

Whether it’s the prospect of curing the incurable or selling billions of widgets to the emerging middle class, both biotech and emerging markets promise a better future.

As such, they are both tailor-made to be “boom and bust” markets.

Both biotech and emerging markets can languish in the doldrums for many years.

But once sentiment shifts, stocks can run up extremely quickly and fortunes can be made overnight.

I believe we may be on the cusp of just such a phase.

Just over the past two weeks, emerging markets equity funds have attracted $5.4 billion in new investment. BlackRock reported a $1.6 billion order for its iShares MSCI Emerging Markets exchange-traded fund (ETF) on April 7, marking the biggest-ever single order for the ETF.

But that’s all still small beer. Investors pulled out 10 times that — $58.2 billion — from emerging markets in the first quarter of 2014. It seemed as if the last emerging markets investors had thrown in the towel.

And it’s hard not to blame them. Over the past five years, investors in emerging markets have been stuck in financial purgatory.

Over that same period, the U.S. stock market has been the place to be. Even after their recent rally, emerging markets are trading where they were in January of 2010, while the S&P 500 has rallied over 85%.

All of this might be about to change. If the current rally in emerging markets turns out to be self-sustaining, they might just morph into the new favorite among momentum investors.

Here’s Why You Should Invest in Emerging Markets

While I don’t manage the billions in institutional money I did during the emerging markets crisis of 1998, investors in my “Global Gains” Investment Program are starting to feel better about the world.

Here’s why…

1) Global Stock Markets are Turning

Of the 45 global stock markets I follow on a daily basis, 11 are up by double-digit percentages this year. The Market Vectors Gulf States Index ETF (MES) — a current recommendation in my Alpha Investor Letter — is #2 with a gain of 22.39%. The U.S. market is #31 on that same list and is in the red so far this year.

2) Emerging Markets Stocks are Cheap

After trailing the U.S. stock market by 38% in 2013, the MSCI Emerging Markets Index is trading at a price-to-earnings (P/E) ratio of 10.6. That compares with a P/E of 15.4 times for the U.S. S&P 500. That’s the biggest discount for emerging markets since 2006. Electronic giant Samsung, the world’s #8 brand, is trading at a P/E ratio of 6.9. Even after its recent rally, Russian natural gas giant Gazprom is trading at a P/E ratio of 2.12 — the cheapest I remember seeing it since Western investors could first buy it in 1997.

3) Currencies are Undervalued

After getting pummeled last year, a lot of emerging markets currencies are undervalued, as I wrote about recently. Not only is India’s stock market hitting new highs, but also returns to U.S. dollar investors have the tailwind of a now rising Indian currency, the rupee. Meanwhile, Citibank suggests that the rupee is still 35% undervalued. All of that means bigger upside for investors who willing to take the plunge.

4) The Trigger of Political Change

All “boom-and-bust” cycles require a trigger. In emerging markets, that trigger is often “regime change” in governments or central banks. Upcoming elections in India, Indonesia and Brazil may just set the stage for a new round of economic reforms in the world’s largest emerging markets. Promises of “hope and change” will always fall short of reality. But often, they’re enough to stimulate a good old-fashioned stock market rally.

The bottom line?

Much like biotechnology stocks, once emerging markets get going, they morph into huge momentum plays. Many emerging markets can soar 50%, 60% or even 80% in a calendar year.

So if you’re a momentum investor, take a look at emerging markets.

Savvy investors in the right markets are set to make a fortune.

In case you missed it, I encourage you to read my e-letter column from last week about why Estonia could be Russia’s next target. I also invite you to comment in the space provided below.

NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Products.