Ending speculations about a partial withdrawal of the economic stimulus or QE3 tapering, the Fed surprised the world with its decision to continue the $85-billion monthly bond-buying program until at least the economy offers some more positive vibes. The ‘no-taper’ decision was particularly shocking given that the Fed Chairman had earlier hinted about his intentions to start tapering in September and gradually phase it out by 2014.
The equity market reacted positively and the news sent stocks soaring with the benchmark U.S. S&P 500 index closing at a record high at 1725.52 (up 1.22%). As stocks continue to move north, let us cherry pick some must-have stocks with strong fundamentals. However, before we zero-in on a handful of priceless stocks, let us recap the various turn of events over the past few months.
Factors that Pulled-Off the Tapering Plug
The Fed cited several macroeconomic headwinds, including high unemployment rate, low inflation, rising mortgage rates and a looming budget standoff as key factors that triggered its no-tapering decision.
Although unemployment rate dropped to its lowest level since Dec 2008 to 7.3%, the U.S. economy added just 169,000 jobs in August as job growth was less than expected. The drop in unemployment rate was primarily due to a 35-year-low labor participation rate of 63.2%, as most Americans stopped looking for a job.
Labor Department data further revealed that job openings hit their lowest level in six months in July to 3.69 million. It is important for the broader economy to have a healthy employment rate as much of the economic progress hinges on its labor market. Consequently, the Fed intends to maintain minimal interest rates until the unemployment rate falls at least to 6.5%.
On the other hand, mortgage rates have skyrocketed in the recent past amid Fed taper mayhem, threatening to derail the healthy momentum in the housing market. The housing sector has been one of the catalysts for the economic growth.
Freddie Mac data reveal that the rate on a 30-year fixed mortgage loan has increased to 4.51% as of Aug 29, from a Nov 2012 low of 3.31%. Higher mortgage rates coupled with increasing home prices are increasingly making it difficult to refinance and buy a new home, thereby somewhat affecting the housing recovery in the U.S.
In addition, inflation, as measured by the personal-consumption-expenditures price index, has also remained healthy at 1.4% in July. The Fed had earlier observed that low inflation is a risk to healthy economic performance and consequently weak inflation data further gives it leeway to lift the economy with near-zero interest rates and bond purchases.
Furthermore, the stage is again set for a showdown this autumn when the Congress would meet to raise the debt ceiling and discuss other budgetary issues and spending cuts. If an amicable solution is not reached between the warring Republicans and Democrats, economic growth could be hampered -- leading to serious consequences for the financial markets, including a possible downgrading of the sovereign credit rating. By deciding to continue with its economic stimulus program, the Fed, therefore, decided to avoid the risk of putting the government in jeopardy.
The Market Response
As the Fed deferred the dreaded tapering program, global equity markets and gold prices went up, while the U.S. dollar and bond yields dropped. While the Dow Jones industrial average was up 115.28 points (0.74%) to 15,645.01, the Nasdaq Composite Index was up 25.59 points (0.68%) to 3,771.29 following the announcement.
The BNYMellonAsia ADR Index gained 2.6% -- the highest such tally realized since June 2008, and the MSCI Latin American stock index climbed 2.7% to 3,428.45. The benchmark BSE Sensex of India was up 3.43% or 684 points on Sep 19. Gold prices rose over 4% on the news – the largest single-day gain since Jun 2012.
The U.S. dollar index fell to 80.376 – the lowest since Feb 20, while the euro soared to a seven-month high of $1.3486. The dollar fell to 97.98 against the yen on the news. The yield on 10-year U.S. Treasury, which hit a two-year high this month at 3.0%, fell to 2.69% on Wednesday.
3 Emerging Market Stocks to Benefit
Emerging economies have largely been the beneficiaries of Fed’s largesse over the years. Cash pumped in the emerging markets through the stimulus program in the U.S. were primarily utilized to plug funding deficits and used for infrastructure projects to fuel further growth.
Amid such an encouraging performance by the equity market across most indices in the recent times, there are certain emerging market stocks with attractive valuation metrics backed by a solid Zacks Rank #1 (Strong Buy). Let’s take a closer look at these companies that appear to be well positioned to benefit from the ‘no-taper’ decision.
Nidec Corporation (NJ): Headquartered in Kyoto, Japan, Nidec manufactures and sells industrial electric equipments like hard disk drives spindle motors and other small precision motors for optical disk drives, laser printers, copiers, polygon scanners, electronic cooling fans, refrigerators, mobile phones, digital video recorders, automobiles and other applications. The stock is trading at a forward P/E of 17.57x and has a long-term earnings expectation of 18.54%.
SouFun Holdings Ltd. (SFUN): The company trades at a forward P/E of 16.98x and has a long-term earnings expectation of 39.81%. SouFun operates a real estate Internet portal, and a home furnishing and improvement website in the People’s Republic of China.
Gruma S.A.B. de CV (GMK): Headquartered in San Pedro Garza García, México, the company produces and sales corn flour, wheat flour, tortillas and other related products. Its product portfolio includes rice, oats, packaged tortillas, grits, snacks, tortilla chips, corn chips and potato chips. Gruma has a forward P/E of 30.99x.
The equity market perhaps is currently passing through a stage of maturity and the euphoria is likely to continue in the short term. As the U.S. stocks continue their unrelenting rally of reaching new highs, this is perhaps the most opportune time to own such high-potential stocks with strong fundamentals that pledge a healthy ROI.