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Emerging Markets: Long Term Investment Opportunity Amid Short Term Economic Uncertainty

June 25, 2014 | About:
AQJ

AQJ

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Although the S&P 500 Index and Dow Jones Industrial Average continue to flirt with their all-time highs in 2014, emerging markets, as measured by the MSCI Emerging Markets Index, have demonstrated negative rates of return for the past year and three year periods respectively. Historically, emerging markets have outperformed the U.S. and other developed markets by a wide margin. According to International Monetary Fund forecasts, emerging economies will represent about 70% of global GDP growth as early as 2014 and their share of total GDP may exceed 50% in the near term. Since 1985, emerging markets’ share of total global capitalization has increased from 4% to 25% and their rates of return retain relatively low correlations to U.S. and other developed equity markets.

Even with the recent unfavorable performance of and volatile economic conditions in Emerging Markets such as Russia, China and Brazil, specific businesses located in these markets offer investors attractive valuations with favorable long term demographics and diversification potential.

Russian oil & gas producer, Gazprom (OGZPY), holds the world’s largest natural gas reserves and provides approximately one-third of the natural gas imported by the European Community and 74% of natural gas to the Russian Federation. Despite the recent unrest between the Ukraine and Russian Federation, Gazprom has been in negotiations with the Chinese government to provide substantial exports of natural gas beginning in 2018 due to the soaring demand caused by rapid urbanization throughout the country. From a valuation perspective, Gazprom is one of the most attractively priced energy companies in the world, currently selling for approximately 33% of its tangible net asset value and 2-3x its trailing twelve month earnings.

With more than 770 million customers, China Mobile (CHL) is the largest wireless telephone company in the world with a market share of more than 60% in China. The firm has historically generated significant amounts of free cash flow, which has provided it with one of the strongest balance sheets in the telecom world. China Mobile has recently launched a 4G network to provide consumers with increased speed for voice and data transmission and reduce the cost of equipment and handsets in the future. In January, China Mobile began selling the Apple iPhone, which is compatible with their new 4G network. In terms of valuation, China Mobile sells for approximately 8 times twelve month trailing earnings, with a net debt surplus on its balance sheet and a dividend yield of approximately 4%.

¹ International Monetary Fund Statistics

About the author:

AQJ
Arthur Q. Johnson, CFA is founder and President of A.Q. Johnson & Co., Inc., a registered investment advisory firm that manages the Mundoval Fund, (www.mundoval.com) a no-load, global value equity mutual fund, as well as individual portfolios for high net worth and institutional clients. He is a Chartered Financial Analyst, a member of the CFA Institute and San Diego Society of Financial Analysts with more than twenty five years of investment experience.

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robintan
Robintan premium member - 5 months ago

I totally agree with the author

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