Experts Say Long Emerging Markets, But Which Ones? How Do I Get In On This Action?

"Long emerging markets" has been almost doctrinally ingrained in the psyches of investors for decades. The strategy remains about as popular and (almost) as successful as NBA legend LeBron James -- for almost as long. We can track this statistically: LeBron joined the NBA in 2003, still plays to this day, may very well win a championship this year with the Los Angeles Lakers, and has etched himself into the history books with an unprecedented run. 

For comparison, long emerging markets has been about as popular as LeBron James in the NBA, relatively speaking just about as successful, and for the same duration of time. We can track this statistically. LeBron joined the NBA in 2003, still plays to this day, may win a championship this year with the Los Angeles Lakers, and has etched himself into the history books with an unprecedented run across a variety of statistical categories.

(G7 vs BRICS 2002-2022)

Check out "The World of Statistics" official Twitter page as reference, over a timeline matches up quite well with LeBron's run. While wishing LeBron James and the Los Angeles Lakers the best of luck chasing more history, consider just how much emerging markets are outperforming and making up groun on first-world markets. If youy thought LeBron James' runw as impressive, look no further than the BRICS nations for power moves that will make your eyes pop. 

(GDP Growth YoY) 

Interested in joining smart money in the very popular "long emerging markets" trade? Of course you are. It is a matter of figuring out which country, or countries, which ETF, which sector, which individual ticker, and this is where the task becomes daunting. In this article, I will highlight a EWZ, which is the iShares MSCI Brazil ETF. This ETF tracks exposure large and mid-sized companies in Brazil. With 55 holdings in total, the ETF is weighted as ~24% financial services, ~21% basic materials, ~16% energy, ~12.5% industrials, and ~9% utilities, and various other smaller holdings by percentrage. 

This fund is trading at a 5.08 price to earnings ratio, which would be considered extremely cheap by the standards of the New York Stock Exchange. For comparison, the forward price to earnings ratio for the S&P500 in the United States has held steadily above 18 this year. All the while, markets remain in turmoil, and as recently as this week, certain aspects of the Home Depot HD earnings reports and forward guidance suggest the real estate sector may finally be due for some level of correction. Earnings are already down year over year, consumers have record credit card debt, and pullbacks in the real estate sector are correlated with further declines in earnings per share. In other words, there is a case to be made that US equities are overpriced.

All the while, there are cases to be made for other BRICS nations, OPEC+ nations, and other individual stocks. For example, they colloquially refer to Alibaba BABA as the Amazon of China. Famous institutional investor Michael Burry recently accumulated more shares of Baba stock. To be clear, in this particular article, I will not attempt to make a case for or against any one particular equity, ETF, or country. I simply with to put the long emerging markets trade in perspective, and highlight Brazil as something of a "darkhorse candidate," so to speak, to surprise many by outperforming. 

There is more than $40 trillion in the US stock market, and over $13 trillion in China. To double in size, the US stock market would need another $40 trillion dollars invested into its market. For China to double, it would only (said with a grain of salt) requre $13 trillion more dollars invested. Therefore, setting aside macroeconomics and geopolitics for a moment, purely mathematically speaking, growth in emerging markets is theoretically more easily achievable with the statistics below as proof. 

(Largest Companies by Market Cap)

It is wrth mentioning Sauda Arabia at this point. The OPEC+ nations do wield a significant number of bargaining chips at the proverbial geopolitical poker table, and Sauda Arabian Oil Co (ARAMCO: Saudi Arabia) is the third largest company by market cap in the entire world. Meanwhie, the current White House is draining the strategic petroleum reserve at record speed, an action they were effectively forced to take once inflation and the Russia-Ukraine conflict nvoked economic havoc.

Speaking of oil, take a look below at the most recent U.S. CPI reading to gauge how close we are to taming inflation. 

(CPI Broken Down by Category, Source: Grit Capital)

At the very bottom is gasoline prices, which can be broken down into a variety of oil and gas products. Suffice to say, the White House intentionally chose to crush oil and gas products. prices by draining the strategic petroleum reserve, drastically bringing down energy prices, transportation, manufacturing, agriculture and therefore food. 

We could get into the US Treasury and Federal Reserve stuck between a rock and a hard place, not to mention politicization of the debt ceiling debate. For now though, let's think of those topics as being extraneous to the point being made here, which is long $EWZ, a Brazilian growth ETF. We are investors. Where can we put our money so that it will appreciate in value? That has been the point of longing emerging markets, and it remains the focal point of this article. 

(Brazilian Stock Market, Source: Bloomberg, Otavio Costa)

Crescat Capital portfolio manager, Otavio Costa, has seen the power of Brazilian equities firsthand. A native of Sao Paolo, Brazil, he is on the record as citing a downturn "since the impeachment of the president (Dilma Rousseff) in 2016," which is not to mention the subsequent prosecution of Luiz Inácio Lula da Silva in 2018, who was freed from prison and has now become president of Brazil again. He goes on to say "these stocks are being traded at similarly low multiples as they were during the global financial crisis. Unlike U.S. markets that remain historically expensive, Brazil is one part of the world that offers a compelling macro and value opportunity." 

(Countries by Size, Source: World of Statistics)

As the fifth largest country in the world, Brazil combines attractive demographics and workforce participation, while boasting top export credentials of iron ore ($46.2B), soybeans ($39B), crude petroleum ($30.7B), raw sugar ($10B), and poultry meat ($7.66B). Brazil can eliminate counterparty risks with other Latin American countries in worse phases of their economic and business cycles with just a few wise policy decisions. Moreover, they can make better use of their commodity-rich land, and vie for a spot as a manufacturing hub for US companies like Apple, freshly moving out of China and into places like India and Vietnam. Also, circling back the CPI readings, Brazil's April data print came in at 4.18%, far better (lower) than the U.S. and many other G7 countries. 

(US President Joe Biden and Brazilan President Luiz Inácio Lula da Silva)

The U.S. has experienced significant turmoil since stocks roared to all time highs in November of 2021. A case can be made that the previous president, Donald Trump, was good for business, therefore good for the stock market and therefore the economy. This can be measured by business conditions and by the appreciation of asset valuations under his tenure. In Brazil, the previous president Bolsonaro was often compared to Trump, in his country's economic performance and in his demeanor. Now both Biden and Lula not only share common hardship and socioeconomic turmoil, but also can find a way to clearly establish common goals. Fundamental and technical analysis are the basis of my trading and investing style. This is the rare case where we must take a speculative look at the value propositions of each of the BRICS nations. 

• Brazil is closest by proximity to the United States, making trade more cost effective. It is my assertion that such a partnership would be mutually beneficial, and most easily achievable in the current geopolitical conext;
• China and the US have each other in their crosshairs, making mutually beneficial agreements unlikely. There is always room for diplomacy, but tensions seem too high for either side to be willing to engage meaninigfully on a variety of topics; 
• Russia. No comment. This speaks for itself. 
• India is a compelling - albeit very inconveniently located - option and strategic partner for the U.S. However, working closely on a variety of beneficial agreements with and receiving assistance from China and Russia (for which it cannot be faulted), from a risk management perspective, this is cause to assume stock market volatility for the forseeable future; 
• South Africa has a bright future ahead, whether it forms alliances with the BRICS, OPEC+, the G7, all or none of the above. It is a "wildcard" in this group, in the sense that all the potential is there, but political and social issues seem to factor into economic drawdowns. Moreover, it is located inconveniently for geopolitical arrangements. 

In summary, we are at an inflection point in global markets. The U.S. stock market may be overpriced, money may not be safe in banks, the U.S. government may default, the debt ceiling could stall out government operations, the U.S. Treasury market performed worse than even the stock market in 2022, so on and so forth. However, in markets, there is always opportunity. 

$EWZ is an interesting option in a propery risk adjusted and hedged investment portfolio. If my speculation that a few stars align, that the business and economic cycles are at turning points in Brazil, then there might be a chance for an excellent entry on this ETF. Moreover, the 30-day yield was last 12.69%. Granted, this dividend will have to decrease over time, but the opportunity to buy low, sell high, while collecting such dividends along the way is tempting, to say the least. 

Lastly, as a disclaimer, I do not own a position on $EWZ, and I do not intend to start one within this quarter. I am patienty waiting more macroeconomic clarity and weighing the many geopolical risk factors. That said, I remain very open to the idea that Brazil could surprise many by exceeding expectations throughout the 2020's.