Editor’s note: This article was first published in January 2014, and is a market outlook for 2014 written that January, including the call on Wall Street versus Europe, the IBEX 35 heading for 11,000 points and growth and index forecasts for Ghana, Kenya, Bulgaria and Romania. None of it should be read as current advice.
Which markets should you invest in?
It’s time for a big review of markets and stocks around the world in search of investment opportunities for 2014. To keep this report from getting too long, and so that it can be digested properly, we’ll split it into several parts. First we’ll try to find undervalued markets and/or markets with potential, and later we’ll look for those opportunities in specific stocks.
Point 1. US or European stocks?
While it’s true that European stocks may be “cheaper” than US ones and at first glance may have much more room to rise, once we look in detail, US companies may still have far more potential than European companies.
The US stock market has been one of the most profitable markets since the crisis broke out. We’ve been waiting for a major correction in the Wall Street indices, a correction that still hasn’t come, and if it does, it would hit European markets just the same.
If we set European patriotism aside, Wall Street-listed companies have more growth potential than European ones, at least from a fundamental point of view. Technically, of course, European markets have much more potential, led by Spain and Italy. Even so, I wouldn’t underestimate the record highs of the Wall Street indices from a technical standpoint. On the technical side, 11,000 points on the IBEX 35 is well under way.
Point 2. The real emerging markets
In November, Jim O’Neill, who coined the term BRIC to describe the emerging economies of Brazil, Russia, India and China, changed the label: the BRICs would now be the MINTs, covering Mexico, Indonesia, Nigeria and Turkey.
But we’re going further, because we shouldn’t underestimate other, much smaller economies that could have dizzying upside.
- United Arab Emirates: made up of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain
- Qatar
- Kuwait
Investing in the United Arab Emirates probably offers one of the best risk-return equations, since that economy is expected to grow at a breakneck pace over the coming years. You only have to look at the hundreds of mega-projects in the pipeline. In fact, its index has delivered dizzying returns.
Whether we’re talking about the Emirates, Qatar or Kuwait, these are extremely wealthy areas that can live in their own property and financial bubble. Although valuations there have risen sharply, we’d keep betting on the region’s financial sector, especially on financial corporations whose boards include the “petro-directors”.
And let’s not forget local companies and national exporters of oil and natural gas.
Singapore
Singapore is replacing Switzerland as a tax haven, so betting on Singapore’s financial sector could also be a very profitable investment.
Sub-Saharan Africa
Although many of these economies suffer from political instability, they could be excellent opportunities both for companies looking to invest there with a long-term view and for investors who want to start building a portfolio in 2014.
Ghana
Ghana has been Africa’s favourite ever since “black gold” was discovered there in 2007. In fact, several reports forecast growth of more than 7% next year.
The International Monetary Fund (IMF) has highlighted the growth of this economy, which is beginning to consolidate its democratic institutions and is attracting foreign capital to boost oil and gas exports.
Kenya
When people talk about Kenya, many picture men hunting lions with a bow (and yes, they may still do that), but Kenya’s stock index has returned 30%, making it the best in Africa.
Kenya is a major bet for institutional investors, and significant economic growth is expected by 2016.
Nigeria
Likewise, this is an economy that went unnoticed for years and is now starting to emerge.
Argentina
Argentina’s problems are high inflation and financial repression. One thing investors probably don’t like is the limit on dividend payments. Even so, the weakening currency will make the country more competitive, and valuations of its listed companies are genuinely very cheap. It’s still a risky market, but it pays off in our risk-return equation.
Pakistan
Wherever we see wars and religious and political conflicts with neighbours, economic weakness follows and drives down the valuation of the economy. But those low valuations can be used to buy into the companies that, all things considered, are the most solid.
According to Reuters, this market has become, and will keep becoming, more attractive because anyone is now allowed to buy shares without explaining where the money comes from, something that will no doubt keep the investment flowing.
Romania
One of the markets most neglected by foreign investors, yet at the same time one of the economies whose growth looks solid. Its public debt is also very low. Its economy is expected to grow by only 2% in 2014, but Romania is a country that is starting to emerge and will need to be built up from scratch.
What’s more, in a few years Romania will become a country that needs foreign labour to build its infrastructure. As an investment, it’s worth keeping in mind for the long term, not least because its listed companies are doing very well.
Bulgaria
Bulgaria’s stock index has gained 55%. Admittedly it only has two companies, Sopharma and Chimimport, but others are expected to be added. It’s a matter of analysing them. Bulgaria is one of the economies that could surprise in Europe over the next few years.
Vietnam
According to many experts, Vietnam could be more profitable than China and Japan; they believe this economy is taking giant strides in modernisation and development.
In the second part we’ll continue with specific companies that, like these markets, could be undervalued and have growth potential.
Further reading
Featured image: Sarah Owermohle, CC BY 2.0, via Flickr.
