In tune with the saying “One good turn deserves another,” advanced economies like that of the U.S. can now afford to smile wryly at emerging economies -- it's payback time.
Five years ago, the U.S. financial system, mired in the worst-hit recession due to sub-prime crisis, witnessed a steady outflow of capital to the safe-haven of emerging countries. Investors had then dumped the lower interest rates and higher equity prices of the U.S. economy for booming emerging markets, which offered higher ROI.
Fast-forward a few eventful years and the ebb and flow of global economic events has reversed. As the inflow of cheap funds virtually dried up, U.S. Treasury prices fell and yields rose. This had a rippling effect around the world, and currencies as well as prices of assets in the emerging markets began to free fall. Gradually, investors started parking their money in the lucrative U.S. market by winding off their investments in emerging countries.
Despite the vagaries in the market, however, emerging economies still boast a handful of excellent stocks. Before we have some cherry-pickings amid the rubble, let us rehash the various turn of events.
A Resilient U.S. Economy
Enduring recessionary forces, the U.S. economy has showed resilience with 200,000 new jobs per month added on an average in the last six months. As a result, unemployment declined to 7.4% from 7.8%. Inflation, as measured by the personal-consumption-expenditures price index, remained healthy at 1.3%. A healthy rebound in the housing market and a continuous uptrend in stock prices across most indices have also been the primary growth drivers for the economy.
With such positive signals pertaining to a slow-yet-steady revival of the economy, Fed Chairman Ben Bernanke announced on Jun 19 his intentions to start tapering and gradually phase out the $85 billion monthly bond-buying program by 2014. Although the announcement did not provide any concrete timeline about when the tapering would start, speculations are rife that the process could begin as early as Sep 2013.
The Rise and Ignominious Fall of Emerging Economies
Emerging economies have largely been the beneficiaries of Fed’s largesse over the years. Cash pumped in the emerging markets through stimulus programs in the U.S. were primarily utilized to plug funding deficits and used for infrastructure projects to fuel further growth. Cheap capital also facilitated these countries to import more than they could export, leading to a burgeoning current account deficit (CAD).
Despite the inherent risks, investors were attracted by relatively high-yielding assets to leverage cheap loans in developed countries. Booming investor confidence triggered by a highly liquid market and healthy GDP growth in most emerging economies was the cynosure of the market.
However, amid signals of QE3 tapering, the dynamics of several economies were unruffled with a near stampede of foreign investors rushing for the exit. Some of the worst sell-offs of bonds and equities sent the respective market indices nose-diving into newer troughs with a mass exodus and reverse wealth drain from emerging economies to the U.S.
For example, data in Indonesia revealed that foreign investors had dumped $430.5 million worth of stocks within a three-day span from Aug 16 to Aug 20, while Jakarta shares lost nearly 11%. On the other hand, the Indian economy suffered an erosion of about $11.5 billion in stocks and bonds since the end of May.
With plummeting currencies and heavy outflows of capital, some emerging economies have taken a slew of measures to stem the CAD. Tapering plans are triggering effective monetary tightening and capital controls by respective governments. Central banks have also stepped in to rescue economies with high rates of interest to thwart further erosion in currency value vis-à-vis the U.S. dollar.
Whether such corrective measures are worthy of a gamble to dilute investor panic and impair long-term growth is still debatable. However, there is no doubt that the foundation of emerging economies is being tested currently.
3 Stocks to Buy Now
Despite the Fed taper mayhem, there are certain top emerging economy stocks with attractive valuation metrics backed by a solid Zacks Rank. These include WNS (Holdings) Ltd. (WNS - Free Report) , Nidec Corporation and Advanced Semiconductor Engineering Inc. (ASX - Free Report) . While WNS (Holdings) and Nidec Corporation retain a Zacks Rank #1 (Strong Buy), Advanced Semiconductor Engineering has a Zacks Rank #2 (Buy).
Headquartered in Mumbai, India, WNS (Holdings) provides business process outsourcing services to diverse industries including insurance, travel and leisure, manufacturing, retail and consumer packaged goods, banking and financial services, telecommunication, media and entertainment industry. WNS (Holdings) has a forward P/E and earnings expectation of 17.58x and 15.50%, respectively.
Nidec Corporation has a forward P/E and earnings expectation of 20.03x and 15.16%. Headquartered in Kyoto, Japan, Nidec Corporation manufactures and sells industrial electric equipments such as hard disk drives spindle motors and other small precision motors for optical disk drives, laser printers, copiers, polygon scanners, electronic cooling fans, refrigerators, mobile phones, digital video recorders, automobiles and other applications.
Based in Kaohsiung, Taiwan, Advanced Semiconductor Engineering has a forward P/E and earnings expectation of 11.31x and 20.00%. The company offers semiconductor packaging and testing services for the communications, consumer electronics, industrial and automotive sectors in the U.S, Taiwan, Asia, and Europe.
Such strong fundamentals signify that the beleaguered stocks are down but not out. As such, this is perhaps the most opportune time to own such high-potential stocks at a discount, with overall market sentiments being a tad bearish.