Trading The Globe: Top Emerging Markets Plays (EEM, SPY, EWJ, EWC, EWA)

Tim Seymour:  A three-day rally has traders wondering whether the emerging markets are safe to dive in again. We lay out both sides of the argument on today’s installment of Trading the Globe.

Despite the 5% rise over three days, the MSCI Emerging Markets Index — and its exchange-traded counterpart iShares MSCI Emerging Markets Index (NYSE:EEM) — is still down 13% for the year to date.

That puts EEM a little below the S&P 500 (NYSE:SPY) and Japanese stocks (NYSE:EWJ) in terms of YTD performance, and only slightly more than troubled European shares.

But with emerging markets lagging their commodity-laden counterparts in Canada (NYSE:EWC) and Australia (NYSE:EWA), EEM is still well behind the venerable barometer of stocks in the developed world, the MSCI EAFE:

Since emerging markets had such a spectacular run since 2002 — 17.9% a year, annualized — the question is whether that phenomenal growth can continue.

The fact is, earnings growth in emerging markets will remain superior to stocks in the developed world for one simple reason: emerging stocks still account for less than 14% of global market capitalization and 47% of global GDP.

That means that simply on a valuation basis, these shares have a lot more room to move, simply to keep up with valuations in the West.

And in fact, about 3% of the total capitalization of emerging markets has disappeared this year as funds flee the markets. As a result, price-to-earnings ratios and valuations are at historic lows, or 9.5 times forward earnings.

The threat of inflation was the main catalyst for these shares declining, but rising prices seem contained by a combination of interest-rate hikes and slowing growth around the world.

There is a note of caution from the dollar here: these stocks seem to have an inverse relationship with changes in the dollar. So, a rally in the DXY or “dollar index” could put added pressure on emerging markets — while a dollar decline could boost their prices.

Either way, there are still plenty of opportunities for investors who are looking to the emerging markets to withstand global contagion fears and maintain safe-haven bids of their own. Look at International Flavors & Fragrances (IFF), Unilever (UN), Qualcomm (QCOM), Nike (NKE), Vodafone (VOD) as your core basket here.

What unifies all these stocks? They are all global giants in hugely recession-resistant businesses. We are talking phones, soap, sneakers and spices.

And they are huge in emerging markets. A full 91% of Qualcomm’s revenue is now coming in from non-U.S. markets and Nike is now an Asia story as well.

Vodafone, the grandfather of emerging telecom plays, is still massive in Asia — especially India — and the eastern side of the European Union. And it pays a dividend of 7%, which only highlights the value pricing for many of these companies:

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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