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3 safe ways to invest in emerging markets

The updates below are recommendations made in the past year as conservative ways to invest in emerging markets.

The updates below are two stocks and one ETF recommended in the past year as conservative ways to take advantage of emerging market opportunities. As economic energy migrates east, these multinationals are shifting their businesses along with it. Strength in these markets is offsetting weakness at home, helping all three stocks increase their dividend in the past year.

 Sun Life Financial (TSX, NYSE: SLF)

Originally recommended on Oct. 22, 2018 at C$49.34, US$37.61. Closed Friday at C$55.83, US$41.61.

 Background: Sun Life has been an Income Investor recommendation, but not previously recommended in the Internet Wealth Builder. It provides a range of life, health, and travel insurance plus financial advice and pension and wealth management. It is an old Asia hand.

Sun Life Asia operates in seven Asian markets including India – where it opened in the 1890s – China, Hong Kong, the Philippines, and Malaysia. In 2018, the Asian unit accounted for 15% of profits.

Performance: We recommended Sun Life Financial, Canada’s third-largest insurance company in October, as a way to participate in the growth of the middle class and financial services in Asia. The shares are 11.7% higher since then.

Recent developments: In its latest year, Sun Life achieved double-digit growth in earnings, increased its return on equity to 14.2%, and increased its dividend twice.

In the quarter ended Dec. 31, the company reported net income of $580 million ($0.96 per share), up from $207 million ($0.34 per share) in 2017’s fourth quarter. That beat estimates as did its results in the previous quarter.

The Asian unit continues to be strong. Its underlying net income of $125 million in the latest quarter was up 26% from the fourth quarter a year ago. As income rises in these markets, sales of insurance and investment products are also rising. Its strongest markets were the Philippines, India, and Hong Kong.

Canadian earnings rose 5.6%  helped by better cost control, while U.S. earnings were 4% lower.

Dividend: The dividend increased 4.4% in November. The forward annual dividend is $1.52, yielding 3.55%.

Outlook: Sun Life should continue to benefit from a growing middle class in Asia, which will mean more demand for insurance and investment products.

Scotiabank (TSX, NYSE: BNS)

Originally recommended on Jan. 16, 2011 at C$56.83, US$57.84. Closed Friday May 3, 2019 at C$73.78, US$55.08.

Background: BNS is Canada’s most international bank and continues to sharpen its focus in two areas. One is wealth management, where it has made several acquisitions in the past year. The other is in Latin America, where it continues to invest.

Scotia gets about 50% of its revenue outside Canada with the so-called Pacific Alliance trading bloc of Mexico, Peru, Chile, and Colombia accounting for 25% of revenue. That should rise as BNS sheds operations elsewhere.

Performance: Scotia’s stock did not perform well in 2018, in line with all Canadian banks. Yet, it was among the best of a bad bunch. Big Six bank stocks fell by an average of 12% in 2018, excluding dividends. Scotia’s shares dropped 8.8%

After another slump in March, BNS shares have been edging higher. The stock is up 8.8% from $68.27 at the start of the year.

Recent developments: Scotia reported a lower-than-expected first quarter profit on Feb. 26. Higher costs in Canada meant lower margins and the bank set aside 26.5% more for bad loans. Quarterly profit slipped to $2.25 billion from $2.34 billion a year earlier.

The good news continued to be in Latin America and its wealth management operations. International banking turned in a record fourth quarter and two announcements after those results were significant. In November, Scotia sold its operations in nine Caribbean countries. In February, it cut its 49% stake in Thailand’s sixth largest bank, Thanachart Bank. The money will be used for acquisitions in Latin America.

Dividend: BNS is a dividend aristocrat. It has increased dividends in 43 of the last 45 years, including two increases in 2016, 2017, and 2018. It raised its dividend again by two cents (2.3%) with the April payment. The stock now pays $0.87 per quarter ($3.48 per year), to yield 4.73% at current prices.

BNS is a conservative stock for growth and income. The Latin operations are an added cushion against weaker performance at home.

BMO India Equity Index ETF (TSX: ZID)

Originally recommended on April 10, 2017 at $22. Closed Friday May 3, 2019 at $28.50.

 Background: This ETF tracks the performance of 15 Indian stocks traded as American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) in New York and London. The 15 are blue chips, among the biggest and most financially stable Indian companies.

Performance: We last looked at ZID in October when it was trading at $22.60. Since then it has moved strongly higher. ZID is up 21.6% since October and 8.28% year-to-date.

This ETF has performed well against its peers. The Sun Life Financial India Fund, formerly the Excel India Fund, is up 4.14% in the same period. The iShares India Index ETF (TSX: XID) is up 6.28%.

reliance__industries
Congolomerate Reliance Industries is one of India’s largest companies with a market capitalization exceeding US $100 billion. Credit: Hindustan Times

Holdings: The better performance can be attributed to the fund’s weighting towards banks, technology, and consumer stocks. The ETF has 38% of holdings in four banks: ICIC, the State Bank of India, HDFC, and Axis. Another 13% is held in conglomerate Reliance Industries, which is involved is everything from energy and textiles to retail and telecom. Larsen and Toubro (11%), a CPPIB partner, is India’s largest engineering firm. Three multinational technology stocks – Infosys, Wipro, and WNS holdings comprise another 20%.

Key metrics: The management expense ratio (MER) of 0.73% is on the high side. The trailing dividend yield is 0.69%, paid annually. The fund was launched in January 2010.

This ETF is suitable for more aggressive investors who can accept emerging market volatility.

(A version of this article appeared in the May 6, 2018 edition of the Internet Wealth Builder investment advisory.)

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