Excellent long-term plays continue to emerge.
You do not necessarily have to invest in EM directly, though that is still the best way to gain exposure.
Buy a basket of Chinese Internet plays.
As I have been writing recently, it is time to add Emerging Market (EM) exposure. I explained in my last note why direct EM plays are a way to actually reduce the overall volatility and riskiness of a portfolio by contributing to a more diversified basket of stocks. It is true that simply investing in a well-diversified portfolio of US large cap stocks you will gain some meaningful indirect exposure to EM. As a matter of fact, a few years ago I was advocating just that as the best way to play EM economic growth, as stocks in the developing world were quite popular, and one could gain lower-cost EM exposure through indirect plays. Nevertheless, following a long period of significant underperformance, EM stocks now trade at large discounts to most of their developed world counterparts, so I am increasingly bullish on select EM equities.
All that said, I realize that there are many investors who do not feel comfortable owning EM stocks. For them, there are still quite a few intriguing opportunities in developed market stocks of companies which do quite a bit of business in emerging markets. I have already recommended Qualcomm Inc (NASDAQ:QCOM) and Banco Santander, S.A. (ADR) (NYSE:SAN) as such plays. Yesterday I bought (or more precisely, sold put options on) Kansas City Southern (NYSE:KSU). The US railroad company issued a profit warning and lowered its guidance for all of 2015. The company actually mentioned the weak Mexican peso as one of the culprits. I have long viewed KSU as a 'chicken' EM play due to its Mexican exposure. Monday's price plunge provides an interesting long-term entry point. While the railroad company's balance sheet is not quite as strong as that of my 'ideal' company, it is not imprudently leveraged either.
For more aggressive (and less valuation sensitive) investors looking for other EM plays, my latest recommendation is to gain exposure to the explosive growth of the Chinese Internet through a basket of three stocks including Alibaba Group Holding LTD (NYSE:BABA), Baidu Inc (ADR) (NASDAQ:BIDU) and Tencent Holdings (ADR) (OTCMKTS:TCEHY). Again, these are not cheap stocks. Yet, their growth prospects make them sort of GARP (growth at reasonable price) plays on a theme with significant long-term potential. In the case of BABA, there is much talk of the overhang created by the expiration of lock-up agreements. This well-known fact has contributed to the current entry point. A basket approach to these Chinese Internet 'blue chips' provides an element of risk reduction in what is a promising but volatile (and some would say speculative) arena.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.