Across the board, big money favors emerging market investments right now. . .
That's because international stocks have a history of higher returns during recovery periods.
Wealthy individuals and bargain-hunting fund managers are leading the charge. And it's never been easier for the average investor to ride such an upswing, by investing in foreign stocks through ADR shares.
Today we'll highlight one tandem play on two top emerging markets.
Private Equity Leads the Charge into Top Emerging Markets
The Emerging Markets Private Equity Association recently conducted a survey to gauge big money's outlook on emerging markets. EMPEA found that 3/4 of funds, endowments, and wealthy individuals they interviewed are already gearing up to put more money in places like Brazil, China, and India.
The industry group's president Sarah Alexander says this spring's findings mark a major change in attitude towards foreign stocks during a Wall Street-led recession.
"In past downturns you have seen investors pulling out of these markets en masse, particularly in 1990-91. . . But now they look at these markets and see growth potential they don't see in western markets."
And there's the heart of the matter―growth. Even this week, Wells Fargo's optimism stoked buying of banking stocks ahead of earnings. The best that investors in domestic stocks hope for is better-than-bad.
In emerging markets, though, raw growth is still the name of the game, giving foreign energy, infrastructure, and telecom stocks a big buyer's benefit vs. the S&P.
Below, we see the year-to-date chart of the iShares Emerging Markets Index ETF (NYSE:EEM) against the broad U.S. benchmark.
So even though U.S. and western European investments have recovered somewhat, in the near-term dynamic emerging markets present the best opportunities.
Now it's time to pick the stars of that growth group. . . so let's look at a company that can tap more than one top developing economy at once: Brazil's Vale (NYSE:RIO).
Investing in Vale (NYSE:RIO)
This Brazilian metal giant enjoys high volume as an ADR, trading 38.5 million shares on average! That high liquidity comes because the metal industry is a barometer of the global economy, and Vale is seeing an increase in demand from China these days.
Quite simplly, Vale is a stock trade on the same recovery trend in emerging markets that the private-equity world anticipates.
Vale CFO Fabio Barbosa said China, the world's #1 iron ore importer, is returning to demand. Even if the current five-week market bull run is a dead-cat bounce and there is more downside ahead for the Dow and S&P, Barbosa and Vale investors anticipate hefty returns going ahead.
"We are in a hiatus period for growth, an adjustment period, but the trend for improvement in the long term is clear," Vale's top number-cruncher said.
Vale's current and forward price-to-earnings ratios reflect the same outlook. Vale's current P/E is just above 10.5, and looking ahead it's priced for incremental but solid growth of nearly 12 times earnings.
Vale also delivers a yield of nearly 3%, right around steel industry rivals Rio Tinto (NYSE:RTP) and BHP Billiton (NYSE:BHP). But Vale enjoys better domestic market growth conditions than those British and Australian competitors.
Brazil is also an investment-grade country since spring 2008, owing to prudent economic policies that balance public spending and debt. In the face of the global downturn, that approach will help the national stock exchange in Sao Paulo and U.S.-listed shares as well.
The iShares MCSI Brazil Index ETF (NYSE:EWZ) has gained more than 24% in the past three months, compared to -2% for the S&P 500.
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