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Look Abroad for Value and Yield
New York: April 09, 2012
By John Stephenson

Risk aversion is back in vogue as markets slumped last week amid a string of disappointing data points. First, the release of the Federal Open Market Committee (FOMC) minutes showed little appetite for further stimulus measures by the Fed. Rising borrowing costs for Spain boosted concern that Europe’s sovereign debt crisis is worsening, causing the euro to fall by the most in 11 months against the yen. And Friday’s dismal increase in American payrolls (+120,000) was the smallest gain in five months, casting doubt on the more than two-year old economic expansion.

Nothing in the release of the FOMC meeting minutes should have been a surprise for the stock market and yet the market fell on the release. What is worrisome is this showcases the difficulty the Fed will have in shifting to a more neutral stance when the time comes. And it highlights how artificial some of the gains for stocks have been and underscores the importance to investors of understanding the big picture for profitable investing.

Further mudding the economic water was the dismal U.S. jobs data. The March reading followed an average 246,000 increase in payrolls in the previous three months and underscores Federal Reserve Chairman Ben Bernanke’s concern that stronger economic growth is required to keep powering the labor market. The jobs data also showed that Americans worked fewer hours and earned less on average per week, boding ill for consumer spending that makes up 70 percent of the U.S. economy.

The only good news in Friday’s U.S. jobs report was that the unemployment rate fell by 0.1% to 8.2%. But this was because the number of people looking for a job dropped by 164,000. This was reflected in the participation rate, which indicates the share of working-age people in the labor force, fell to 63.8% from 63.9%.

The situation in Europe isn’t any better with European stocks falling for a third week, the longest losing streak since August with fresh worries that the euro-area has yet to contain its debt crisis. And while markets are clearly worried about Spain’s fiscal and banking sector troubles, I don’t share the market’s pessimism that the current troubles will devolve into an outright Spanish default.

Although Spain’s deficit is elevated, its debt-to-GDP burden is set to track 80% this year, matching that of Germany. Not only that, but the ruling party enjoys a majority government, enabling it to stay the course of austerity. The ECB has the means to buy Spanish bonds or to further extend its Long Term Refinancing Operation (LTRO), its massive liquidity operation for Europe’s banks, should further Spanish stresses flare up.

Earning season is about to kick off this Tuesday with Alcoa reporting after the close. The U.S. earnings party may be drawing to a close as a recent modest pickup in unit labor cost could signal that firms have pushed cost-cutting to the limit. Europe’s struggles are also an issue for corporate America since Europe has accounted for half of the activity of US-based multinationals in recent years.

Investors in search of better opportunities beyond North America might be well advised to consider a new hunting ground—emerging markets. Countries such as Brazil and China have often been considered too risky for average investors, but lush dividend yields and attractive valuations are luring western investors.

Several emerging markets have matured to the point where companies no longer have to spend huge amounts on building infrastructure and can hike dividends. The dividend yield in emerging markets is between 3 and 3.5% for the MSCI Index, a range that is higher than the dividend yield in American and higher than any Western government bond. Best yet, companies in emerging markets are cheap, trading at about 10 times forward earnings.

With Western markets facing some short-term headwinds, investors should concentrate on dividend paying stocks which pay you to wait. By going abroad investors will be getting a steady income stream as well as a dash of growth. Offerings such as WisdomTree Emerging Markets Equity Income ETF (DEM—NYSE) offers a yield of 4.1% and exposure to South Africa, Brazil and Taiwan, while SPDR S&P Emerging Markets Dividend ETF (EDIV—NYSE) is 46% invested in financials and information technology stocks while boasting a 4.4% yield. Investors looking to buttress their portfolios from the approaching storm should consider looking abroad rather than staying in the choppy investment waters of the West.

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