PeterKohli

Peter Kohli is the chief executive officer of DMS Funds and an independent wealth manager specializing in estate planning under the name DMS Financial. Earlier, he held a variety of financial services-related positions, including financial planner involved in the sale of mutual funds. He holds a Chartered Financial Consultant (ChFC) designation from The American College (Bryn Mawr, PA). DMS funds currently offers the DMS Baltic Index, DMS India Midcap Index, the DMS India Bank Index and DMS Poland Large-Cap Index funds .

Peter Kohli’s Latest Posts

There’s a lot of talk about emerging markets slowing down — and I don’t dispute that when they’re all lumped together. Certainly the iShares MSCI Emerging Markets Index EEM, +0.62%  is down 7% year-to-date vs. gains of 26% in the domestic market, according to SPDR S&P 500 SPY, +1.27%  and the developed foreign market, which is up 14% as tracked by iShares MSCI EAFE Index .

Looking at emerging markets as a category, however, can prevent an investor from spotting breakout opportunities. They are not all the same. As I say in the opening of every presentation I make: It’s a mistake to view emerging markets as an asset class because they are all so different. You can’t call emerging markets an asset class any more than you can call U.S. equities an asset class. Just consider the BRICS (Brazil, Russia, India, China, South Africa) — which are hardly identical; Brazil and Russia export oil, while China and India are oil importers.

To help you uncover the breakout emerging-market investments, I’m going to reveal the three traits the most-promising emerging economies share. Then I will detail four specific company stocks that are poised to benefit from their home country’s prosperity.

Here are three traits to look for when contemplating investment in an emerging market.

A solid domestic investor base

A solid domestic investor base reduces volatility. Emerging markets without this essential foundation are reliant on cheap institutional money and are essentially importing volatility. No doubt, those emerging markets with a solid domestic investor base will fare better than those without one when the U.S. Federal Reserve begins to taper quantitative easing in 2014.

I see India and Turkey working to boost their domestic investor base to mitigate that volatility. One demonstration of this is that both have been talking about having 401(k) plans similar to those we have in America. This is a good first step toward increasing domestic participation in the market.

That said, this will be a challenge in India, which has one of the lowest domestic participation rates in the world right now. It’s hard to see this changing with banks giving depositors 9% risk free. But, I’ve noticed that over the last three months the Indian market seems to be turning a corner. The mid-cap index is up 12% and the banking index is up 8% over this period. If this performance continues into 2014, it could be the necessary draw to stronger domestic participation.

Lower current-account deficits

A lower current-account deficit is good for a country, and displays financial responsibility that attracts favorable markets attention. The Baltic countries, with balanced current accounts, are among of the leaders in this regard. Since the financial crisis, they’ve shrunk their account deficits. While this improvement may be cyclical and part may be structural, a large portion of this improvement rests on import contraction.

Infrastructure

The third step these countries must take on is the job of building or rebuilding infrastructure. Turkey is doing this by building a third airport in Istanbul, a new Bosphorus tunnel, and numerous highway, rail and port projects. Nigeria also understands the importance of infrastructure and is addressing its infrastructure needs with the launch of a $1 billion Eurobond to finance power projects. Ghana, with its oil revenues now flowing, has started projects like a solar power plant and a desalination station that will provide half a million people with drinking water. The Ivory Coast has a level of established infrastructure that is unrivalled in West Africa that contributes heavily to its GDP growth, which surged in 2012 after a contraction the previous year.

India, Poland, Baltics

The markets that have the best chance for breakout success in 2014 are those that best exhibit these three traits.

In my opinion India, Poland and the Baltics are all on this path. Within those countries, I see specific investments that are strong on their own and can only be made stronger as their governments make positive moves.

In India, which can be viewed as the technology hub of Asia, the tech sector, both indigenous and otherwise, should do well. Two stocks I’m especially bullish on are Wipro WIT, +0.99%  and Infosys INFY, +1.73% both of which can be purchased as ADRs on the NYSE.

Returns for Wipro are three-month (8.21%), six-month (48.29%), one-year (52.76%), three-year (8.67%) and four-year (59.67%). Returns for Infosys are: three-month (9.72%), six-month (38.92%), one-year (47.39%), three-year (2.32%) and four-year (40.90%). (Note: All above data is average rates of return, not cumulative.)

Poland, now taking its place as the manufacturing hub of Europe, is poised to benefit as the EU starts coming out of its recession. Poland has a very skilled workers who are paid at lower levels than the EU norm. Nearly 60% of Poland’s energy is from coal, and Bogdanka LWB, +1.22%  is a company that is literally powering Poland’s manufacturing base as one of the leading coal producers for industrial and power industries. Returns for Bogdanka are three-month (16.98%), six-month (11.57%), one-year (3.85%), three-year (8.33%) and four-year (18.90%).

The Baltics’ booming middle class has helped upscale retailers do very well. Apranga APG1L, +0.36% is a holding company for Armani, Hugo Boss among others. The Baltics challenge is holding onto their middle class, which has real spending power. They may face a brain drain if they don’t create an economy that encourages and promotes a middle-class lifestyle. Returns for Apranga are three-month (-1.95%), six-month (2.86%), one-year (17.21%), three-year (9.74%) and four-year (65.40%).

These stocks, while robust individually, are poised to do phenomenally well in 2014 as their home countries take the steps necessary to build a foundation — a solid domestic investor base, reduced account deficit, healthy infrastructure — supportive of continued development and attractive to investors.

Disclosure: Kohli owns all of the stocks mentioned.