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Emerging Market ETFs Rally in Spite of Trump Trade Threat

In the wake of Donald Trump’s election, emerging-market ETFs tumbled as investors feared that the new administration’s protectionist trade policies would hurt the countries in these markets. But then a funny thing happened. After ranking as one of the worst-performing sectors in the last quarter of 2016, emerging- market ETFs began the new year with a rally and are outperforming U.S. stocks.

So far this year, Vanguard FTSE Emerging Markets ETF (VWO) has jumped 10%, iShares Core MSCI Emerging Markets ETF (IEMG) leapt 10%, and the iShares MSCI Emerging Markets ETF (EEM) climbed 10% vs. 5% for the SPDR S&P 500 (SPY).

Part of the reason is that prior to the election, 2016 had been a pretty good year for emerging markets. Because many emerging markets are tied to commodities, the prior four years had been pretty bad because of falling commodity prices and slowing growth in China. But in 2016, commodity prices began to rise and China’s economic slowdown stabilized.

A big part of the postelection drop was out of concern for the economy of Mexico should Trump attempt to renegotiate Nafta and anxiety over trade barriers with China, according to Mitch Tuchman, chief investment officer at Rebalance IRA, a retirement investment advisor, in Palo Alto, Calif.

Robert Johnson, Morningstar’s director of economic analysis, said the recent performance is a continuation of last year’s rally. He also said companies and investors have begun to think that, in the wake of Trump’s mishandling of the immigration ban, he might not be able to implement his trade policies, especially as he gets pushback from industries hurt by trade bans and tariffs.

Also, since the trade policies haven’t yet been defined and investors think most emerging markets, besides Mexico and China, won’t be affected, they’re jumping back in.

“After five years of underperformance, emerging markets were oversold, and the election flushed out the remaining people hanging on,” said Gerald Laurain, chief investment officer with FTB Advisors, an RIA in Memphis, Tenn., with $4 billion in assets under management. “So now that they’ve established a low, the only place to go isup.”

J.J. Feldman, a portfolio manager at Miracle Mile Advisors, a Los Angeles-based RIA, said the valuations are much more compelling. The price/earnings ratio on the emerging markets is 12 vs. an expensive 18 on the S&P 500. He added that emerging- market stocks are yielding 2.25% vs. the S&P’s 2%.

Peter Schiff, CEO of Euro Pacific Capital, an asset manger in Westport, Conn., has a different angle. “When there is protectionism, America is the loser,” he said. “And tariffs will backfire. People are making the connection that it will weaken the dollar. Meanwhile, the euro is bottoming out and that is better for emerging markets.”

“Europe seems to be doing better, and it’s more important to China than the U.S.,” said Johnson. “There’s better growth there, no new rules and other markets they can sell into.”

So far through this year, the top country-specific ETFs are all in emerging markets. IShares MSCI Brazil Small-Cap (EWZS) has soared 30%, VanEck Vectors Brazil Small-Cap (BRF) surged 26%, iShares Brazil Capped (EWZ) is up 18%, Global X MSCI Argentina (ARGT) up 16%, and KraneShares CSI China Internet (KWEB) up 16%.

After a brutal two-year recession in Brazil, during which President Dilma Rousseff was impeached and replaced by Michel Temer, the country is finally expected to be on the road to recovery. Finance Minister Henrique Meirelles expects the Brazilian economy to return to a 2% annual growth pace by the last quarter of the year. Wall Street is forecasting a more realistic 0.2% growth rate in 2017 gross domestic product. Brazil’s economy is driven by resources and commodities. Its top commodity exports are oil, iron ore, soybeans, sugar cane and coffee.

While China is seeing its economy slowing, with GDP expected to post growth of 6.7% for 2016, that’s the kind of slowdown most country’s would kill for. Right now China is dealing with a cooling housing market, explosive growth in debt, and painful structural reforms instituted by President Xi Jinping.

“E-commerce is going well and that is tapping into a strong part of the economy,” said Rob Lutts, president and chief investment officer of Cabot Wealth Management, an RIA, in Salem, Mass. Lutts spends a lot of time traveling in China. “Investing in Alibaba is like investing in Amazon.com.”

Lutts said that China will have a big challenge over the next five years with a big debt bubble that will have to be distributed over the rest of the economy. This will bring the economic growth rate down to 5% by 2020. “They will have stress when the real estate bubble comes down in price, and that will hurt the smaller banks in the next six months.”

But Lutts is very bullish on India. For the fiscal year ended March 2016, India’s economy grew 7.9%, and Lutts said it could go higher. Indian Prime Minister Narendra Modi is instituting reforms to remove government obstacles to business and make the government more efficient. Lutts said his favorite way to invest in India is in the financial services sector.

He thinks HDFC Bank is one of the best-managed banks in the world. It’s also the top holding of iShares MSCI India ETF (INDA), No. 3 in WisdomTree India Earnings Fund (EPI), No. 2 in iShares India 50 ETF (INDY) and No. 3 in PowerShares India Portfolio (PIN). The ETFs’ year-to-date gains range from 8.8% to 9.8%.

Overall, all the experts think that because Europe is growing and Trump’s policies are still undefined, emerging markets should keep rising throughout the year.

Orginally published in Investor’s Business Daily.

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6 Cult Stocks to Buy and Sell

Mythic status is typically reserved for sports heroes and Oscar winners, but lately a bunch of stocks have acquired the mantle. These issues are sitting on astronomical price gains and have a cult-like devotion among their followers, I mean, shareholders.

You know the type: true believers intent on convincing you their company is changing the world and destined to grow forever. With a religious fervor, they tweet and blog and paint Facebook walls to defend their investments. It’s no surprise cult stocks are the most dangerous kind to sell short (try to profit from a falling stock by selling borrowed shares with the intention of buying them back for less).

That’s not to say these companies don’t deserve special status. “They become cult stocks because they pass the uniqueness test,” says R.J. Hottovy, Morningstar’s director of consumer research. This comes from creating a unique product or retail or food-service concept. Some are fads, like Crocs, and blow up fast, taking late-arriving speculators for every last dollar. Others succumb gradually to knockoffs, changing tastes, or some rival’s better technology. But enough develop their brands into icons and accumulate immense financial firepower.

No wonder, then, that such companies’ shares don’t just appreciate steadily. They soar far beyond what is realistic if you link the stock to fundamentals such as the profit margin or the earnings growth rate. Eventually, it gets tough to reach ambitious targets for year-over-year sales and earnings growth. But in a market starved for stories, who is to say a cult stock cannot go ever-higher on momentum?

So we decided to study six to see if the business remains on the cutting edge and if their devotees still drink the Kool-Aid. (All prices and stock-related data are as of March 16.)

Apple (AAPL, $330.01)

It’s no shock that the king of the cult stocks is Apple. Whenever Apple launches a new product — think iPod, iPhone, iPad and iTunes — it changes the consumer electronics industry and a lot of others, including Wall Street. As we pass the two-year anniversary of when the stock market bottomed in early March 2009, Apple stock has more than quadrupled from its 2009 low of $78. The Standard & Poor’s 500-stock index only doubled.

While Apple’s product lines have seen phenomenal growth, Apple only owns a small share of its growing markets. The iPhone holds 16% of the global smart-phone market, and the Mac claims less than 5% of the world’s personal-computer volume. Apple shares trade at just 15 times this year’s earnings estimate, almost a five-year low for the price-earnings ratio. Compared to the S&P 500’s P/E of 15 times 2011 estimates and 23 for big tech stocks, Apple actually looks cheap. We rate it BUY

The other five cult stocks are Netflix (NFLX), Amazon.com (AMZN), Priceline.com (PCLN ) Chipolte Mexican Grill (CMG) and Polo Ralph Lauren (RL).

For the full article go to Kiplinger.com or if you prefer go to the slideshow for this article.