The interest rate plateau has finally broken. After almost a decade of a zero interest rate environment, and a series of heated arguments, muddles, ifs and buts, and indecisions, the Fed has ultimately gathered all courage to increase the rate for the first time. And the U.S. stock market has so far taken the game in a positive spirit buoyed by the Fed’s faith in the economy as a whole.
World Economy: Prepared to Brace Rate Hike?
But is this really a sigh of relief for the world market, especially when several of its economies are already baffled by low commodity prices and rising debt, all directing toward an economic slowdown? No wonder, the foreign investment market is currently undergoing severe cacophony with yesterday’s induced monetary policy of the world’s largest economy.
Fed’s decision leading to further strengthening of the U.S. dollar will put more pressure on emerging economies with dollar-denominated bonds worsening the situation for the foreign stocks.
With shares being volatile and underperforming, and with the presumption of U.S. liquidity improvement through rate hike anytime in 2015, investors have already withdrawn $500 billion from emerging markets this year. The trend is here to stay, according to the estimates of the Institute of International Finance (IIF).
Their October report states that, “Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988. Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China.”
Any Respite Soon?
Certainly, the rate hike is not going to address the present grief of foreign nations, at least for now; even though Fed promises that the benefit will eventually percolate across the nations. However, the data stated above clearly indicates that the market had already started to react to this anticipated Fed hike long before, and nothing unusual is expected all of a sudden.
We, like many other economists, are also hopeful about Fed’s lenient approach for the first time in history – not an overnight change, rather a gradual rate increase over a span of three years.
Invest in ADRs
While the overall situation is dubious in the outer world, reverse play can always prove effective. Much like the surge witnessed in our domestic markets on the rate hike, foreign benchmarks too are expected to enjoy a strong bull run down the line. More specifically, with the U.S. dollar gaining more sheen with the rate hike, foreign investors will be attracted further toward dollar-denominated assets that promise higher returns.
In light of the above discussion, the key rationale holds in choosing a handful of ADRs that are at present floating handsomely in the market. Below are four ADR stocks that have already started showing early signs of growth leveraging on the Fed rate hike and have huge potential to outperform going ahead. All these stocks currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Hanwha Q CELLS Co., Ltd. HQCL
This South Korean business tycoon is a big name globally in the field of solar power. Through a growing global business network that spans across North America, Europe, Asia, South America, Africa and the Middle East, the company provides services and long-term partnership in the fields of utility, commercial, government and residential markets. U.S. and China are already the dominant leaders in the world solar power market.
However, with the Bank of Korea reducing its benchmark interest rate four times since Aug 2014 leading to a considerable devaluation of the South Korean won; HQSL through its strong fundamentals and richer resource currently has full advantage of price competition in the overseas markets. Additionally, the hike in Fed rate has undoubtedly fetched much opportunity for this company to earn more from the U.S. investment market. This is evident in the 5.2% rise in the company’s stock price following yesterday’s rate hike announcement. HQCL currently carries a Zacks Rank #2.
JinkoSolar Holding Co., Ltd. JKS
In solar power, another large icon and popular ADR floating on the NASDAQ is Chinese company JinkoSolar Holding. With world demand for solar power growing in leaps and bounds, specially in the developing and densely populous nations, JinkoSolar has shown rapid growth with its vertically integrated photovoltaic module with a total annual capacity exceeding 4 GW and over 9 GW of modules deployed worldwide.
With its domestic market still in the recovery stage, the Fed rate cut might act as another blow devaluating the domestic yuan further. JinkoSolar, however, should reap benefits in both ways – one by giving tougher price competition on offering cheaper products in the overseas market and two, by floating money in the appreciated U.S. market. Shares of this Zacks Rank #1 stock rallied 8.5% on yesterday’s close.
Harmony Gold Mining Company Ltd. HMY
This NASDAQ-traded ADR is a renowned gold miner with operations in South Africa and Papua New Guinea (PNG). Its Greenfield exploration in fiscal 2015 yielded encouraging results which the company expects to continue in fiscal 2016.
We also encouragingly note that, last week, shares of this U.S. traded stock surged 45% in Johannesburg trading as the local currency fell to a record low against the dollar. As a result, the Fed rate hike, resulting in an expected devaluation of the South African rand further, will act as another cost cut on the company’s domestic operations. This stock with a Zacks Rank #2 increased 2.7% at yesterday’s closing.
Sappi Ltd. SPPJY
This Zacks Rank #1 stock is a South African manufacturer and seller of dissolving wood pulp, paper pulp and paper based solutions to direct and indirect customers worldwide. Backed by a growing demand base worldwide, this company is gradually developing into a growing and profitable diversified wood fiber group focused on specialized cellulose with cash generative and profitable paper businesses and other high-margin industrial products. Following the Fed rate hike yesterday, the stock increased 1.9% at closing.
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