With the third quarter drawing to a close and a possible economic recovery beginning to take place, many investors who have been sitting on the sidelines are anxious to get back into the market and put their money to work again. With overriding fears about inflation and concerns about the U.S. dollar, many investors are turning to international markets for investment opportunities.
It’s about time.
American investors tend to focus on American stocks, and while that might have been a good strategy twenty years ago, it is no longer acceptable for investors who claim to want a truly diversified portfolio. America is no longer the sole engine of economic growth, and while China, Germany, and Japan may receive most of the international attention from American investors, the opportunities hardly stop there. I see four often overlooked markets that are poised to deliver particularly strong returns in the fourth quarter, and well beyond. Taiwan, South Korea, Turkey, and the Netherlands can deliver great value for investors looking to get in for the long term, given the potential for another “jobless recovery” in the U.S.
Taiwan finds itself in a very precarious position: it is less than 150 miles away from a rising superpower that doesn’t even recognize its independence. Nevertheless, the people of Taiwan share an ethnicity, culture, and language with the Mainland Chinese, and relations have improved significantly over the past few years. Taiwan and the People’s Republic have begun to allow their citizens to travel more freely between the two countries and Taiwanese investment is beginning to flood the mainland, even in critical industries such as computer chip and LCD manufacturing. As the two economies become more intertwined, look for continued investment and trade between the two countries to fuel robust growth in Taiwan.
Taiwan also sends exports to Southeast Asia (specifically Singapore) and the U.S., giving it a very diversified international customer base. Despite its small size, Taiwan has the fifth most foreign currency reserves in the world (over $325 billion), which adds further stability to the Taiwanese economy. Should Taiwan need to spur domestic consumption, it is likely they will be better positioned than most in Asia given that an unbelievably low 0.95% of the population below lives below the poverty line.
The iShares MSCI Taiwan Index Fund (EWT) has a huge position in the information technology sector; it comprises nearly 60% of the portfolio including a 14.4% stake in Taiwan Semiconductor. The fund also has a robust dividend yield well over 5%.
South Korea (EWY)
To most Americans, Seoul, the capital of South Korea, doesn’t come to mind when one thinks of leading business centers, even in Asia. However, according to a recent report, Seoul is ranked 9th in the Global Cities Index, ahead of Beijing and Washington D.C., and is the second largest metro area in the world. South Korea also has strong ties to the U.S., which allows it to benefit from continued American investment. This, along with a strategic location between the massive Asian economy of the post war period (Japan) and the rising economic superpower of the 21st century (China) ensures that South Korea, will be an important investment location for years to come.
South Korea has arguably one of the most technologically immersed populations on the globe. It has the highest level of broadband access per capita in the world, the second most broadband subscribers per capita, and the highest level of scientific literacy. This high level of access to technology, as well as scientific knowledge, has created one of the world’s leading technology sectors. As such, the South Korea tech sector stands to benefit from increased spending on electronics as countries pull out of the recession and is positioned to play an integral role in the next global technological revolution.
The iShares MSCI South Korea Index Fund (EWY) offers diversified exposure to the South Korean economy, with five sectors comprising more than 10% of the portfolio (IT, financials, industrials, materials, and consumer discretionary).
Turkey has a well diversified economy that is poised to grow quickly in the 21st century. With a young population and strategic geopolitical location, Turkey will continue to be an important market bridging the gap between West and East. Not only does Turkey provide a great deal of products to European Union members, but it has a quality transportation network including state of the art shipbuilding, modern airports, and even high speed rail. This continued investment in infrastructure will help Turkish goods access markets quickly and help spur more investment from other regional powers.
Another positive for the Turkish economy is their friendly relations with the EU. Turkey has applied to become a member of the European Union, and while there is a significant debate over the country’s inclusion (including French and German opposition), no country that has been recognized as a candidate has ever been rejected for EU membership. Should Turkey someday get into the European Union and adopt the Euro, the country could benefit from greater stability and easier movement and investment between Turkey and the developed countries of Western Europe.
The iShares MSCI Turkey Investable Market Fund (TUR) is not for the squeamish investor; nearly 50% of the fund is in financial stocks and its beta is around 2.0. It does, however, offer an attractive P/E just under 17, and pays a decent dividend yield as well.
This may be a surprising choice given the emerging market nature of the other three picks, but the Netherlands has plenty of potential. Shockingly, the Netherlands has the 7th largest current account surplus standing at over $65.5 billion, so it stands to benefit should the market recover and demand increases for its goods. A large part of this surplus is due to their energy resources in the North Sea. Currently, the Dutch are the 5th biggest exporter of natural gas, which will come in handy should tensions between the EU and Russia continue to escalate.
While often maligned, exports of commodities may not lead to such an adverse situation as the much talked about “Dutch Disease” did in the 1960′s due to the country’s use of the euro. Since the Netherlands is such a small part of the eurozone and most of the exports go to fellow eurozone members, it is hard to envision a scenario in which the euro appreciates due to Dutch natural gas exports which will help keep Dutch manufacturing from becoming too expensive. Overall, The Dutch economy, while not unscathed by the recent crisis has managed to weather the storm better than most, with an unemployment rate of just 4.0% which is among the lowest in Europe.
EWN also pays a solid dividend yield of 3.55% with a P/E below 20. The fund invests in some global brands such as Unilever (16.8% of holdings), ING Group (11%), and Phillips (7.5%), while still maintaining 20% of the portfolio in small and mid caps. For more actionable ETF ideas, make sure to sign up for our Free ETF Newsletter.
Disclosure: No positions at time of writing.