GMO Forecast July 2020 - Emerging Value is the Only Game in Town

 GMO published their latest 7-year forecast for July 2020, and most asset classes have dismissal expected returns over the next seven years from US large stocks to emerging stocks and large and small international stocks. Let's not even get started with bonds that are just as bad.

While we would consider gold, silver and other so-called real assets to be a potentially good long term investments at this point in time, those are not tracked by GMO, but we've noticed one exception in GMO chart: Emerging value.

9.2% yearly returns over seven would be an excellent investment in those days and age, but as we can see GMO separates emerging and emerging value, so we can't just buy any emerging stocks trackers.

But what's a value stock exactly? Here's Investopedia definition:

A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.

They are often opposed to Growth stocks, often referring to stocks in the Technology and Biotechnology sectors with very high P/E ratios.

 Investopedia main takeaways:

• Common characteristics of value stocks include high dividend yield, low P/B ratio and/or a low P/E ratio.
• A value stock typically has a bargain-price as investors see the company as unfavorable in the marketplace.
• A value stock typically has an equity price lower than stock prices of companies in the same industry.

So value stocks may be dividend stocks with low price-to-book and low price-earning ratio. This includes utilities, banks, consumer staples, and some commodities producers.

So our best bet would be to find value stocks in undervalued emerging markets, which last time we looked included Russia, China, Turkey, Hungary, and South Korea. With Russia, it's easy as most stocks are value stocks, and we could just add a Russia ETF to our portfolio such as MSCI Russia Capped Index (3027.HK) in Hong Kong and VANECK VECTORS/RUSSIA ETF (RSX) in the US.

China is more complex since the stock indexes include highly priced technology company such as Tencent, Allibaba and Baidu. One such option is Value China ETF (3046.HK) whose top holdings include Chinese banks, real-estate companies and insurances.

All companies are listed in the Hong Kong stock market. Alternatively, there's also Value China A-Share ETF (3095 HK) with companies listed in China, and more of a Chinese consumers story with 35% Consumer Goods, 34% Financials.

Note that while Google Finance shows there's no dividend paid out, you'd get ~2% dividend paid out yearly.

I had more of a struggle finding a China value stock in North America, and one of the closest would be Horizons China High Dividend Yield Index ETF (HCN.TO) listed in Canada.

The funds distributed dividends every quarter. The current is 6.77% based on info from Yahoo Finance.

I will not look into Turkey due to geopolitical risks at the moment, nor the smaller Hungary market, and complete this post by checking out South Korea. If you want to invest in South Korea, there's limited choice when it comes to South Korea ETF, and most people will not be able to purchase stocks on the KOSPI exchange.

That means we'd have to accept getting some experience to technology stocks like Samsung Electronics (PE: 17.49, DY: 2.53%), Naver (PE: 64.40, DY: 0.12%),  or  SKHynix (PE:22.3, DY: 1.34%) through South Kora ETF such as iShares MSCI South Korea Index Fund (EWI). 

 

In any case, I'm uncomfortable purchasing stocks in the September-October months due to the high-valuation in the US stock market, and a stock market sell off in the US, may lead to a rise in the US dollars, and a sharp drop in emerging stock markets. If it does happen, it will certainly be an interesting buying opportunity. 

Undervalued Markets in March 2020 - Top 10 Countries

Value and contrarian investors will always look for undervalued and unloved markets or stocks, and one tool I like to use to find out which market may be worth looking into is Starcapital stock market valuation that ranks different countries based on their CAPE (Cost Adjusted Price Earning Ratio), average dividend yield, price-to-book ratio, and price-to-sales-ratio. They also show RS26 (26-weeks relative strength) and RS52 ratio to show which markets were oversold or overbought in respectively the last 6 months and the last year.

This is what the map looks like on February 28, 2020 with countries in blue being undervalued, and the ones in red being overvalued using CAPE as reference.

Russia, Turkey, Poland, Oman looks to be quite undervalued using this metric, while the US, Ireland, Switzerland, New Zeland, and Finland are overvalued.

Here's the top ten list of the most undervalued markets as of March 2020.

That's Russia, China, Italy, Spain, Singapore, Turkey, Austria, South Korea, Portugal, and Hungary.

Starcapital does not use the CAPE as the only metric to rank to the country with average PC (Price-to-cashflow), PB (Price-to-book), and PS (Price-to-sales) ratios. To find out if the CAPE is undervalued, one needs to look at the long term ratio for each country, and the ratio can not be compared between countries because each stock market has different types of companies. For example, Russia will have a large share of companies related to the oil business which command a lower price-earning ratio. Sadly, the company does not provide its historical data, so I'll just trust its color scheme for that part.

If the price-to-book ratio is lower than one, that means the stock price is cheaper than the book value, and it's always a good metric to check you don't overpay for a stock or market. If the dividend yield is fairly high, that's often a sign, stocks are undervalued as well.

I view the relative strength index more as a timing tool, as it shows whether the stocks for a given country were sold or bought during the time period. Starcapital allows to filter results as well, and I often set PB to one or lower, and RS26 to a value under one (e.g. 0.94).

That leaves us with 5 countries: Russia, Singapore, Austria, South Korea, and Poland. The next step is to look at mid-term charts (e.g. 10 years) to see how stocks performed. I like to use trading economics.

The Russian stock market did very well in the last 6 years, and we did buy a Russian ETF (3027.HK) in 2014-2015, and sold in October/November 2019. It went up further since then, but a correction happened due to the Coronavirus panic. If the market corrects further it could be a nice entry point.

The Singapore stock market (STI) has been trading in the 2600-3500 range in the last ten years, so if it goes back to 2700 points it may be an interesting entry point. Looking at an even longer-term chart, we can see the market performed fairly well since 2002, but as a smaller country, it may suffer more in downturns.

Next up is the Austria stock market (ATX), which we can see went down for over 2 years.

Looking at the chart since 2001, we can see the ATX never covered in a big way from the GFC (Global Financial Crisis) in 2008.

It's almost 50% below its all-time high in 2017..., and if we look at the long term bottom trend we could go a line showing there may be opportunities right now. I still feel uneasy investing in Europe due to structural issues with the Euros though.

The 10-year chart of the KOSPI (South Korean stock market) shows the index did not return much over the last ten years, and long term bull markets are often born from a long bottoming process.

To balance that, the KOSPI did really well in the first decade of this century, quadrupling from 500 points to over 200 points in 2007, but 13 years later we are still at the same point. It's been a long wait for investors who are still getting a 2.3% dividend yield at this time.

Let's finish with the Polish stock market (WIG). The last two years have been brutal which should explain why it's now considered an undervalued stock market.

It seems to be at the bottom of the trends (using a line passing through 2012 and 2016 bottoms), but the 20-year chart shows again the great performance of emerging markets in the 2000's.

Yet the WIG is still well below its all-time high in 2017. All those five markets look interesting, in the short term are likely to be affected by the impact of the Coronavirus outbreak, the policy decisions of central banks and government around the world, and potentially the health of the US stock market which looks to be extended at this time, but we'll look into the later in a subsequent post

Jim Rogers: North and South Korea may Merge Within 5 Years

Following the death of Kim Jong-il this week, Jim Rogers was asked his views on North Korea and South Korea. He expects them to merge within 5 years in what would make a strong Korea with cheap labor and natural resources in the North and good management in the South.

You can invest in South Korea via iShares MSCI South Korea Index (EWY) or IQ South Korea Small Cap ETF (SKOR). There is currently no easy to invest directly in North Korea, especially due to US restrictions on North Korea.