Get Ready To Buy Emerging Markets

If you removed this sector, earnings growth for the rest of the S&P would slow by nearly 50%. And its dividends are projected to grow by 17.5% in 2014... Open this email in your browser | Add us to your address book | View the print version February 27, 2014 Get Ready To Buy Emerging Markets By Michael Vodicka As I write this I'm sailing across the sky, 35,000 feet in the air in a Boeing (NYSE: BA) 777, heading home from a great vacation in Grand Cayman. It's one of the most beautiful islands in the Caribbean. White sandy beaches and great snorkeling and diving. I also like vacationing in Grand Cayman because of its stable currency. The Cayman dollar is pegged to the U.S. dollar. That fixed-exchange rate shelters the Cayman dollar from unpredictable price swings that could negatively affect its economy. It also makes it easy for me to forecast my expenses for the week. But that kind of currency stability is an anomaly in many emerging markets right now. For countries with floating rate currencies, inflation has been wreaking havoc. In India, onion prices recently jumped 300%. In Brazil, the CPI (consumer price index) topped the highest estimates in 2013. In Turkey, key lending rates were raised from 7.75% to 12% to defend the value of the lira. In Argentina, inflation recently spiked to 25%. Sponsor Forget the Gulf Coast...Here's Where The REAL Money In Natural Gas Will Be Made We've found a small town (pop. 8000) so rich in natural gas that billions of investment dollars are pouring in. Soon this little town could be selling liquefied natural gas (LNG) to lucrative Asian markets for HALF the cost of LNG produced in the Gulf of Mexico. Early investors could make a fortune. This presentation explains everything. Naturally, investors want to know if these signals are transitory or the beginning of a larger issue. Opinions on the Street are mixed. Here's what I think... In the short run, I expect emerging markets to remain under pressure due to fear over inflation. How long? A few months at most. But heading into spring and summer -- and in the long run -- I view inflation as a positive for emerging markets. That may seem counterintuitive. But here's what the market is discounting: Emerging markets are rich in natural resources. Brazil is a global leader in chicken, beef, soybeans and oil. And Chile is the world's largest copper producer. South Africa is a leader in gold and minerals. With rising prices already popping up in emerging markets, it's only a matter of time before inflation shows up in commodities. Particularly food and energy. Higher commodity prices will function as a wealth transfer mechanism to emerging markets providing the building blocks for global economic growth. That relationship between commodity prices and emerging markets is already well-documented. Check out the correlation between iShares MSCI Emerging Markets (NYSE: EEM) and PowerShares DB Commodity Index (NYSE: DBC). The two markets are trading close to a record spread right now after emerging market stocks fell more than commodities in the last few months. Rising commodity prices aren't good for economic growth. But their bigger impact is on GDP growth in emerging markets. An upward move in commodity prices would be a big boost for emerging markets. I also believe emerging markets will benefit from their already compelling valuations. As you can see from the chart above, emerging markets have been trading sideways for the last three years. But what investors have failed to realize is that while they haven't had tremendous stock returns, these emerging market economies have been expanding much faster than developed countries. That misunderstanding has the MSCI Emerging Markets Index trading at just 11 times earnings. Not only is that a massive 40% discount to the MSCI World Index, it's the widest gap since the financial crisis of 2008 and a 10-year low. There's no question emerging markets are going through some tough growing pains right now. But I think rising commodity costs and the group's multi-year low valuation will attract new capital and support a reversal heading into spring and summer. I will continue to watch this sector closely for the best opportunities to share with readers of my premium advisory, High-Yield International, in the coming months. The simple fact remains that when you start looking abroad, high-quality stocks paying 6%, 8% and even 14% dividend yields aren't nearly as rare as you might think. I've written about several of these international high yielders in recent essays. I've found a Spanish bank -- one of the largest in the world -- paying a 9% dividend yield at today's prices, plus one of Brazil's largest independent power producers that's paid investors a whopping 14% dividend yield over the past year. If you want to know more about the high-yield opportunities I'm finding abroad, including names and ticker symbols, I invite you to check out my latest free report. Click here to get them right now. Good investing, Michael Vodicka Chief Investment Strategist High-Yield International To ensure that you receive these emails, please add us to your address book. Disclosure: StreetAuthority does not own any shares of any of the securities mentioned in this article. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any "real money" model portfolio. 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