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Companies Poised to Profit From Emerging Market Development

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some emerging market-focused stocks to your portfolio, the PowerShares Emerging Markets Infrastructure ETF  (NYSEMKT: PXR  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.75%. The fund is fairly small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has underperformed its benchmarks over the past three years, but what matters most are your forward-looking expectations, as the world's economies heat up. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why emerging market infrastructure?
Our global economic slump won't last forever, and emerging markets, by definition, have a lot of development plans. Thus, companies specializing in materials and utilities are poised to prosper as construction and infrastructure projects get under way and manufacturing kicks into a higher gear.

More than a handful of emerging market infrastructure specialists had strong performances over the past year. Mexico-based global cement giant Cemex (NYSE: CX  ) surged 58%, for example, and is near a 52-week high, benefiting partly from sales in the U.S. The company is expected by some to return to profitability next year. Still, its negative free cash flow is worrisome, as is its considerable debt, despite refinancing. A bright spot is the CEO's expectation of price hikes in the U.S.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Brazilian steel company Gerdau (NYSE: GGB) is down 22%, but has been investing in building its capacity, which might be smart, given that Brazil is building for the 2016 Olympics and the 2014 World Cup, among many other projects. Its revenue and earnings have been growing, and its free cash flow is positive. Its forward P/E has recently been just 10.

Caterpillar (NYSE: CAT  ) shed 19%, partly on fears of a housing slowdown in China due partly to high interest rates. Still, long term, China has a lot of building and developing to do, and will likely need much equipment from Caterpillar. With a current P/E ratio near 11 and a forward P/E near 9, the stock does seem compellingly priced, especially with its 2.3% dividend yield.

Brazil-based Vale S.A. (NYSE: VALE  ) , the world's largest iron ore concern, shed 17% and recently yielded a solid 3.3% and a forward P/E of 8. It's poised to profit from growth in China, and has been enjoying double-digit growth rates for revenue and earnings over the past few years, though earnings recently tumbled. The global recovery hasn't been happening as rapidly as it would like, and in the past few months, it suspended activity at an Argentine mine. It bodes well that the company's CEO is talking of restrained and disciplined capital spending.

The big picture
Demand for infrastructure work isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.


Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand-new report. Just click here to access it now.

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Related Tickers

9/28/2016 10:19 AM
CAT $84.35 Up +1.47 +1.77%
Caterpillar CAPS Rating: ***
CX $7.90 Down -0.04 -0.50%
Cemex CAPS Rating: ***
PXR $30.29 Down +0.00 +0.00%
Emerging Markets I… CAPS Rating: **
VALE $5.54 Up +0.10 +1.84%
Companhia Vale CAPS Rating: ****