Emerging-market stocks rose toward the highest level since China’s currency devaluation last year, while volatility fell to an 11-year low, on optimism earnings are improving and central banks remain supportive of growth.

More than half of developing-nation companies that have reported financial results for the last quarter have beaten estimates, following similar positive momentum in the U.S. and Europe.

The MSCI Emerging Markets Index climbed 0.5 percent to 874.98 at 9:22 a.m. in New York, heading for the highest since Aug. 11 and tracking gains in Europe after the U.K. reported second-quarter growth that was quicker than estimated. Eight of the 10 industry subgroups on the developing-nation gauge rose, led by technology companies.

The old wisdom is that the best time to buy stocks is when things are at their worst. The problem is knowing just when that is and not investing your money at the beginning of a prolonged period of stagnation. Thus many investors look for the first sign of an uptick in order to buy and ride a bull market to profits. If this a good time to purchase, why buy emerging market stocks?

Strong Dollar, Offshore Bargains and ADRs

The US dollar is strong and will likely get stronger as interest rates go up in the USA. The current best guess is that rates will go up in December and not before. Nevertheless, a strong dollar makes stocks in foreign countries cheaper, even if you purchase them via American Depositary Receipts (ADRs). You hope, of course, is that when the dollar weakens and the foreign currency gets stronger that your investment in that country will profit both from the business and from the exchange rate. The web site Top Foreign Stocks offers lists of foreign ADRs available from Austria through Zambia. Here is Zambia.

• Copperbelt Energy Corp: Electricity
• Zambeef Profits: Food Producers
• Zambia National Commerce Bank: Banks
• ZCI Limited: Industrial, Metals, Mining

We are not suggesting that you buy any of these specific stocks but rather suggest that you look at companies that make money within the country instead of exporters. This is because virtually all commodities are denominated in US dollars so the exchange rate changes make little difference to the value of the stock. But in a growing economy the service sector can prosper and your profits will be denominated in an eventually stronger currency.

ADRs and Analysis of Intrinsic Value

Successful long term investing requires that you look at the intrinsic value of the stocks that you buy, hold or sell. The value of ADRs is that first of all you do not need to speak a foreign language or buy stocks in a foreign market. And secondly top level ADRs provide the same sort of financial info that US stocks do which allows you to make an accurate assessment. To the extent that you spend the time researching emerging market stocks and make reasonable picks you will have a stock portfolio that is nicely diversified across currency exchange rates and various world economies.

Why Buy Emerging Market Stocks? PPT

The outlook is improving for some of the world’s most-battered currencies after a plunge in raw materials spurred routs from the Colombian peso to Russia’s ruble in 2015.

Analysts are forecasting gains for the currencies most linked to oil even as they see more declines in store for those with stronger ties to industrial metals, such as Chile’s peso and Peru’s sol. After its worst year in more than a decade, Canada’s dollar may bounce back with crude, while the Australian and New Zealand dollars are poised for tumbles as policy makers consider interest-rate cuts to spur growth, forecasts for next year show.

While a slowdown in China continues to hurt exporters, signs that the world’s second-biggest economy is stabilizing and increased clarity on the timing for U.S. rate increases are bolstering speculation that commodities will rebound from their worst year since 2008. Crude, grains and soy are all expected to rise next year, even as precious metals such as gold slip or stay little changed, according to analysts surveyed by Bloomberg.

The point is to invest offshore when a currency is weak in relation to the U.S. dollar and sell when the situation is revered. Due to the fall in oil and other commodity prices many foreign currencies have suffered. Here is a chart from Bloomberg with anticipated movement of foreign currencies versus the USD in the coming year.

Simply on the basis of a better currency outlook one might consider directing foreign investment in 2016 towards Canada (CAD), South Africa (ZAR), Colombia (COP), Russia (RUB) or Norway (NOK). Nations to avoid in anticipation of a further currency slide are Chile (CLP), Peru (PEN), Australia (AUD), Brazil (BRL) and New Zealand (NZD). One nation left out of this list and whose currency may well slide next year is China.

China

There are a lot of good reasons to avoid China for foreign investment in 2016. The country’s real estate bubble has not yet been resolved. Chinese exports and imports are falling as its economy slows. And there is a huge load of US dollar denominated debt that may lend itself to a hard landing of the managed capitalism economy. The South China Morning Post predicts a measured fall in China’s yuan.

While the People’s Bank of China might be opposed to a sharp depreciation in the value of the yuan, the reality of tighter US monetary policy does help justify a measured fall in the value of China’s currency against the dollar.

It would also be a natural by-product of China’s own economic policies, which, in 2016, will probably be aimed at boosting domestic aggregate demand through continuing application of accommodative policies.

There may be a time in a year to two to invest in China again but for the time being expect to see a falling yuan and weakening Chinese economy.

Colombia

Eventually the recovery story of the year could be the Colombian peso. The value of the peso is linked to the price of crude oil from which Colombia derives most of its foreign currency. Despite the fall in value of the Colombian peso due to low oil prices Colombia’s economy grew the most of all South America this last year according to Latin Correspondent.

Trade and agriculture exports helped Colombia’s economy to pull in a 3.2 percent year-on-year growth this quarter. This makes Colombia the fastest growing economy in South America.
Hotels, restaurants, retail, and business services contributed a total of 4.8 percent to the growth.

An important factor for Colombia is progress in talks with rebels in Havana to end the longest running civil war in the hemisphere. Colombia appears to be one of the nations that are best positioned to provide a good return on foreign investment in 2016.

Foreign Investment in 2016 PPT

As always do your own homework before investing.