Emerging markets (EM) refers to countries that are between developing and developed. In the past few years, as shown below, exchange-traded funds (ETFs) that track EM stocks have underperformed US equities, as measured by the S&P 500. But they have done better than the European stocks.
EM ETFs vs. S&P 500 and Stoxx 50
A good way of getting exposure to the emerging markets is through low-cost ETFs. These funds help you invest in a basket of the best EM stocks at a fraction of the cost. These funds include the Vanguard FTSE Emerging Market Fund (VWO) and the Schwab Emerging Markets Equity Fund (IEMG).
However, if you are an active investor, you can select individual stocks to invest in. This is possible through the over-the-counter (OTC) market or several brokers, like Interactive Brokers. Here are the best five emerging market stocks you should invest in today.
Naspers – South Africa
Naspers is a company many people in the United States have never heard about. However, millions of people use its products every day.
At its core, Naspers operates three businesses. It owns a sizable stake in Prosus, a company that is listed in both Johannesburg and Amsterdam. It also owns Media24, a leading publisher of magazines, newspapers, and other digital content. Also, Naspers owns TakeAlot, the biggest e-commerce platform in South Africa.
So, how do most Americans use its products? Well, Naspers owns a 31% stake in Tencent, a Chinese technology company that is listed in Hong Kong. Tencent, on the other hand, owns popular gaming groups like Riot Games and Fortnite publisher, Epic Games.
Through Prosus, Naspers owns substantial stakes in companies like AutoTrader, CodeAcademy, Delivery Hero, Udemy, and LetGo. This makes the company one of the biggest technology investors in the world.
Looking at its income statement, you see that Naspers revenue has been on a downward trend. It has moved from $5.1 billion in 2012 to $4 billion in 2019. However, this trend is not wrong. It is simply because the company spun its business into Prosus and listed it in Amsterdam. You can see this in its balance sheet, where it has more than $8.32 billion in cash and total debt of just $3.5 billion.
Alibaba (BABA) – China
A decade ago, China was nowhere in terms of technology companies. That has changed recently, with the country becoming home to some of the best-known internet groups. Alibaba is the best example of how this trend has happened. The company has grown from a small e-commerce platform to a $732 billion juggernaut with the presence in almost all sectors.
For example, in payments, Alibaba owns a 30% stake in Ant Financial, the giant company that will soon be listed in Hong Kong and Shanghai. It owns Taobao, the biggest shopping platform in China, with more than 7 million sellers. It also owns Lazada, Alibaba Pictures, and InTime, among others.
Alibaba’s growth has been phenomenal. It has moved from just $3.7 billion in 2012 to more than $86 billion in the past 12 months. It is also highly profitable, with an annual profit of more than $19 billion. Further, its balance sheet is excellent since it has more than $60 billion in cash and $17 billion in debt. Compare the performance of BABA and the S&P 500 in the past five years.
BABA vs. S&P 500
StoneCo (STNE) – Brazil
Payment is a fast-growing industry worldwide. Indeed, in recent years, companies like PayPal, Square, and Adyen have become among the biggest technology companies in the world. Another firm that most people have never heard about is StoneCo, a Brazilian company that counts Warren Buffett as a leading investor.
The company provides PoS systems to both e-commerce and retail stores across South America. It also owns Pagar, a company that helps small businesses accept digital payments. Its other businesses are Mundipagg, Equals, and CAPPTA.
StoneCo was started in 2012 and has been on a strong growth trajectory. Its revenue has grown from just $54 million in 2016 to more than $248 million. Most importantly, unlike other companies its size, SoneCo is profitable. It made a net income of $200.1 million in 2019 and has already made $143 million this year. STNE has done better than the S&P 500 in the past year. It will likely continue doing that because of its strong presence in the South American market.
Taiwan Semiconductor (TSM) – Taiwan
The world is changing rapidly, with technologies like autonomous cars, cloud computing, artificial intelligence, the Internet of Things (IoT), and machine learning taking center stage. All these sectors will depend on the semiconductor or chip industry.
To manufacture these chips, many companies, including Advanced Micro Devices (AMD) and Nvidia, rely on Taiwan Semiconductor, which owns the world’s biggest foundry.
As a result of recent growth, TSM’s revenue has been growing. It has risen from just $14.38 billion in 2010 to more than $44 billion in the past 12 months. It is also a high-margin business that has generated a net income of more than $16 billion in TTM.
Because of how it is structured, TSM does not have a substantial amount of debt. Its total long-term and short-term debt are more than $12 billion, which is substantially less than its total cash of $25.5 billion. Its market share, the future of computing, and its high margins make it a worthwhile emerging market stock to invest in.
TSM has been on a strong rally.
Infosys (INFY) – India
Infosys is a large Indian conglomerate valued at more than $63 billion, which offers multiple business solutions to some of the biggest players in the world market. Some of its services include application development and maintenance, consulting, and business process management, among others.
It is a well-known brand in recruitment and is a key beneficiary of Joe Biden’s presidency. That is because Joe, unlike Trump, will be more welcoming to foreigners.
INFY operates in a highly-competitive industry. Its biggest competitors are companies like IBM, Accenture, and Cognizant Technologies.
You should invest in Infosys because of its strong revenue growth, its long business relationships with companies like HSBC and Daimler, and the upcoming Biden presidency.
INFY vs. S&P 500
It is always a good thing to have exposure to many countries for diversification purposes. As mentioned above, a simpler and cheaper way is through ETFs. However, you can invest in these five emerging market companies if you want stability and growth.