Best stocks to buy in emerging markets.
While emerging market stocks had an excellent end to 2019, the first few months of 2020 have been no better for them than domestic stocks. It should come as no surprise that emerging markets in Asia have taken a beating, and Latin American equities have also been hit. A price war between OPEC and Russia over oil production has taken its toll on countries that rely on crude exports, and manufacturing-heavy countries have faced unprecedented challenges as supply chains experience major disruptions. Despite the difficulties companies face from a virus that doesn't care much about borders, there are still some attractive emerging market stocks to watch that should benefit when the global economy eventually recovers. Consider these 12 emerging market picks.
Alibaba Group Holding (ticker: BABA)
Just as Amazon.com (AMZN) has benefited from a massive shift to online shopping domestically, Chinese e-commerce giant Alibaba has seen an incredible surge in revenue over the last few months. The company reported a 22% increase in revenue during its fourth quarter, as the number of consumers using Alibaba's platforms grew about 2% -- and although Alibaba's profits fell, they still outpaced analyst expectations. Meanwhile, Alibaba's cloud business revenue increased 62% year over year as the rates of video content consumption and remote working both skyrocketed. Management believes that, in spite of the pandemic, 2021 will be a banner year, and it expects sales to increase more than 25% during the fiscal year -- and investors may want to buy in now before they miss out on that growth.
Few companies' share prices have risen in the midst of the health crisis, but Tencent's stock has done precisely that. Considering it is not only the largest gaming company in the world but also owns China's largest social media platform, it makes perfect sense. Tencent's revenue rose 26% last quarter and earnings advanced 6% as gamers stuck at home spent more, sending online-gaming revenue up 31%. Tencent has warned that gaming revenues will normalize as quarantines end, but with online gaming accounting for 35% of Tencent's revenue, the current growth is still great news for the tech company. Tencent's monthly active users on its WeChat and Weixin platforms increased 8% last quarter, video subscriptions increased 26% and music service subscriptions increased 50%. It seems likely those new users will stick with Tencent.
Mobile TeleSystems (MBT)
Alibaba and Tencent are both Chinese tech giants with expansive global ambitions and bigger valuations than most public companies. But the best emerging market stocks aren't all from China. Mobile TeleSystems, a telecommunications and wireless company, hails from Russia. As is typical of telecoms, MBT is a slow and steady grower, rewarding shareholders with a nice dividend. In fact, "nice" is an understatement: Mobile TeleSystems yields roughly 10%, in addition to trading for about eight times forward earnings. MBT is a fine foreign stock to buy for the long term. Just keep in mind that fluctuations in the ruble and geopolitical tensions can weigh on its shares -- although shares have somehow managed to hold their own despite all the chaos of 2020.
Telkom Indonesia (TLK)
Indonesia has reported shockingly low numbers of viral infections during the pandemic, which bodes well for Telkom Indonesia, the country's largest telecom provider. The number of mobile users in Indonesia has surged alongside its huge increase in population over the last few years. Telkom Indonesia has reaped the rewards through its mobile subsidiary Telkomsel, which accounts for 70% of the company's earnings and reaches 90% of the country's population. Last year, Telkomsel saw a 54% increase in data traffic, which translated to a 23% increase in digital business revenues. Meanwhile, Telkom's home internet business IndiHome reported that its customer base grew more than 37% last year, and revenue at Telkom's digital services segment grew nearly 30%. Telkom provides investors with a 3.5% dividend yield as a cherry on top of all that growth.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor is the global leader in integrated circuit manufacturing. TSM shares certainly weren't hit by the trade war in 2019, with the stock gaining about 65% in all. The company's exposure to secular growth markets such as smartphones (49% of revenue), high-performance computing (29%) and the Internet of Things (9%) creates plenty of additional long-term upside for investors in the $250 billion tech giant. Part of that long-term upside relates to 7-nanometer chips for 5G smartphones, which should help trigger revenue growth once the pandemic cools down a bit. With very little debt on its balance sheet and a dividend yield of more than 5%, TSM looks like a steal.
China Mobile (CHL)
China Mobile is the world's largest mobile operator and has a customer base of more than 800 million subscribers. When the year began, the stock's 21% decline in 2019 had already pushed its enterprise multiple near 10-year lows, and fortunately for contrarian investors, the stock has only gotten cheaper year to date. The company's focus on broadband and emerging businesses is well-positioned for the future. Like many telecoms, China Mobile also pays a sizable dividend yield that clocks in at more than 6%. The consensus price target on CHL is currently more than $50 a share, representing more than 40% upside from early June levels.
Arcos Dorados (ARCO)
Arcos Dorados is a stock U.S. investors may find themselves more comfortable with than Russian and Indonesian telecoms. That's because the Uruguayan restaurateur operates a string of familiar joints: McDonald's Corp. (MCD). It's a franchisee of massive proportions, with roughly 2,300 Mickey D's locations in 20 countries and territories throughout Latin America. A brand like McDonald's is a one-of-a-kind, immensely valuable asset with international value. Although ARCO will likely swing to a loss in 2020 due to being blindsided by the pandemic, analysts expect revenue to jump 20% in 2021 and for the company to return to profitability.
Trip.com Group (TCOM)
Over the last two decades, the number of Chinese tourists traveling the world has increased at a staggering rate, and companies like Trip.com Group -- China's largest online travel site -- have enjoyed parallel growth. Unfortunately, Trip.com has had to watch its shares fall more than 20% since the beginning of 2020 after reporting a 42% decline in first-quarter revenue. But when the Chinese travel industry does eventually rebound, TCOM will be well-positioned for the upswing, as the company owns more than a third of China's massive online travel agency market. The company is already seeing a recovery of domestic travel within China, and with its price-earnings ratio of 17 well off of the 72 times earnings it sat at in December 2019, TCOM stock makes for an excellent value investment.
China Life Insurance (LFC)
China Life Insurance is the largest life insurance company in China, holding roughly 20% market share. Some analysts believe trends like a robust renewal business, a shift to a longer-term product mix and the potential for further market share gains could act as long-term drivers. Although shares have fallen amid the pandemic fallout, the stock currently trades for less than seven times earnings, boasts low debt and pays a modest 1.2% dividend. For the time being, shares trade right around book value. And the consensus target price of just more than $14 per share implies about 40% upside, should that come to fruition.
As the world begins to get a handle on working from home, one of the largest information technology firms in India is well-prepared to meet increased demand. Infosys has enjoyed an excellent fiscal 2020, with both revenue and earnings per share rising by just more than 8% thanks to nearly 38% growth in its digital business revenue, a segment that accounts for 42% of the company's overall business. That digital business will only continue to grow in importance as companies keep their employees working at home and utilize Infosys' services. In the meantime, no debt, high free cash flow and an operating margin north of 21% means Infosys should not only weather the pandemic but come out on the other side stronger than ever.
As companies around the world reel from the effects of the virus, Baidu has managed to hold its ground. In spite of announcing a 7% decline in revenue last quarter, investors greeted Baidu's earnings with a sigh of relief as the company beat the general analyst consensus. The company's strength lies in its diversification -- while its core businesses saw revenue decline 13% thanks largely to advertising industry headwinds, Baidu's artificial intelligence businesses enjoyed modest growth. Subscriptions for iQIYI, the company's online video platform, grew by 23%. The company saw daily active users in its Baidu app increase 28% year over year to 222 million, and the app has proven to be a sticky ecosystem that should allow Baidu to continue to profit from China's massive mobile user base.
Sberbank of Russia (SBRCY)
Sometimes things have to get worse before getting better, and that's exactly what's happening at Sberbank, the largest bank in Russia. Last quarter, the bank reported a 46.8% decline in profits as it increased reserves in preparation for a slew of expected defaults. Its return on equity declined 12.6%, sending shares down about 25% year to date. With viral infections surging in Russia, it's tough to call the bottom for SBRCY, but the company has found a strong ally in the Ministry of Finance of the Russian Federation, which became Sberbank's largest shareholder in April. Under the ministry's protection, Sberbank will be able to survive the negative effects of the pandemic. And the hit to the bank's stock price has given it an enticingly low P/E ratio around five, making it an attractive long-term value play.
The best emerging market stocks to buy for 2020:
-- Alibaba Group Holding (BABA)
-- Tencent (TCEHY)
-- Mobile TeleSystems (MBT)
-- Telkom Indonesia (TLK)
-- Taiwan Semiconductor Manufacturing (TSM)
-- China Mobile (CHL)
-- Arcos Dorados (ARCO)
-- Trip.com Group (TCOM)
-- China Life Insurance (LFC)
-- Infosys (INFY)
-- Baidu (BIDU)
-- Sberbank of Russia (SBRCY)