How To Play The Emerging Markets Trend In 2010

By Eric Fox | January 22, 2010 AAA

Most pundits have predicted the increasing influence of emerging economies as the world economy shifts. A look at the market capitalization changes for world stock markets shows evidence of this shift over the last year.
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This surge in the market capitalization of emerging countries' stock markets also reflects a sense by investors that those areas represent better investment opportunities compared to Western or industrialized nations. Expectations on currency and interest rate moves also have a large effect. Westerners have begun to realize the unexplored potential that has arisen in South America, Asia and other parts of the world. As investors tend to move away from home bias in light of the immense growth opportunities around the world, an internationally balanced portfolio is emerging as a new means of diversification.

Although some countries made huge moves up in terms of their market caps, their absolute percentage relative to larger nations such as the U.S. remains relatively small. The United States retained its lead as the largest stock market in the world by market capitalization, starting 2009 at 32.75% and slipping to 29.61%, despite the market rally.

Japan was second at 7.68%, but lost a large portion of its global stock market weight, as it started 2009 at 10.28%. Although Japan remains a fairly safe investment option, other Asian markets have been able to attract some of this lost market share. The same can be said for America.

The Brazilian stock market increased its global share by nearly 60%, with an increase in its current global market capitalization to 2.92% from 1.84% at the beginning of 2009. This was the largest percentage increase among all nations.

China also saw a large move during 2009, with its percentage moving from 5.61% to 7.27% as its economy continued to grow through the worst global economic contraction in generations. China now has the third-largest stock market after the U.S. and Japan, and is challenging Japan for second place. India was another strong contender, and saw its share move from 2.01% to 2.79%.

Emerging Market ETFs
Investors who want to play the emerging markets trend in 2010 can invest in various exchange-traded funds (ETF) that reflect the main indexes of various foreign stock markets.

The iShares MSCI Emerging Markets Index (NYSE:EEM) tracks emerging stock markets in general and can be used to invest in a broad range of countries with large weightings toward Brazil and China, particularly in financial sectors.

The iShares FTSE/Xinhua China 25 Index (NYSE:FXI) invests most if its assets in the 25 largest company stocks in China.

The iShares MSCI Brazil Index (NYSE:EWZ) invests in large cap Brazilian stocks. Having an approximate combined 25% weighting in Petrobras and Petroleo Brasilerio, EWZ has a primary focus on energy and industrial materials sectors.

Investors who want to stick with, or at least hold a portion of stocks listed on U.S. markets can buy into the S&P 500 (NYSE:SPY).

Changes in market capitalization seem to reflect the higher and resilient growth of emerging economies, and there are many ETFs around to invest in that trend. Investors should understand, however, that many factors influence this shift besides economic growth. (For a more comprehensive analysis of international investing, check out Does International Investing Really Offer Diversification?, Investing In China and Evaluating Country Risk For International Investing.)

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