For many U.S. investors, home town bias continues to run rampant. However, this bias could be costing many investors some real long-term gains. The United States hasn't been the top performing equities market in any of the last 10 years. Built on the backs of fiscal responsibility, commodity wealth and rising incomes, emerging and developing markets are poised to be the world's economic catalysts going forward.

Already the top 10 emerging market nations, including China, India, Brazil and South Korea, already account for more than 33% of global economic output. Yet, despite the growth, many investors continue to allocate hardly anything to these faster growing nations. For investors, several analysts are now forecasting big gains in the emerging world for 2012 and now could be a good time to remove that hometown favoritism.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Historically Cheap
For investors looking to add more developing market exposure to a portfolio, now could be a great time. A variety of investment banks and analysts have high hopes for the economies. Total return estimates for emerging market stocks run the gamut from 10% to well over 30% by year end of 2012. Analysts at Morgan Stanley (NYSE:MS) predict that the MSCI Emerging Markets Index (ARCA:EEM) could rise as much as 39% in 2012, driven by a "soft landing" for the Chinese economy and cheap stock valuations.

This echoes similar valuations by researchers at PIMCO, UBS and Citigroup. Overall, the fact that many policymakers across a range of emerging market countries have moved to strengthen economic growth by not raising interest rates, is a bullish sign. The bulk of analysts predict that anti-inflation policies seem to be working and the focus is now about continuing economic prosperity. (For related reading, see Equity Valuation In Emerging Markets.)

In addition, emerging market equities are extremely cheap, by historical measures. According to Bloomberg, the broad MSCI EM Index is currently trading at only a 9.5 forward P/E or 17% discount to its five-year average. China's Shanghai Composite can be had for a P/E of just 13.2, about half of what it was trading for last year. Former World Bank official, and the person who coined the term "emerging markets" in 1981, Antoine van Agtmael recently said, "Emerging markets as a group are now as attractive as I have seen them on both a historic and comparative basis at any time in the last 25 years ... I see 2012 in emerging markets as a year of positive investment returns, positive economic growth and positive earnings growth."



Betting Big On Emerging Markets
With the emerging market nations trading for historically cheap metrics, now could be the best time to bet on the group. There are plenty of ways to add exposure, with the Vanguard MSCI Emerging Markets ETF (ARCA:VWO) being one of the best. The ETF tracks 910 different emerging market firms, including heavyweights like Petroleo Brasileiro (NYSE:PBR) and China Mobile (NYSE:CHL). The fund charges a dirt-cheap 0.22% in expenses. Similarly, investors can use the PowerShares FTSE RAFI Emerging Markets (ARCA:PXH) for a broad play.

Many analysts expect the Asia-Pacific to be the real driver of gains in 2012, with China leading the way. Analysts predict that central banks in the region will keep easing monetary policy, as inflation problems subside. This will boost shares of banks and real-estate companies. SPDR S&P Emerging Asia Pacific (ARCA:GMF) makes a great over-arching play, while the iShares FTSE EPRA/NAREIT Developed Asia Index (Nasdaq:IFAS) can be used as a real estate play. Despite having "developed" in its name, the ETF has more than 46% of its holdings located in Singapore, Hong Kong and China.

Finally, dividends continue to show their strength in the market's recent volatility. Both the WisdomTree Emerging Markets Equity Income (ARCA:DEM) and the EGShares Low Volatility EM Dividend ETF (ARCA:HILO), with their respective 4.72 and 6.73% yields, make great choices to add a "safety net" to an emerging markets portfolio.

The Bottom Line
For investors, 2012 could be the year of the emerging market. Developing market equities are trading for historically cheap amounts and a variety of analysts are predicting big gains in the year ahead, for these nations. By adding or increasing exposure, portfolios can benefit for the favorable trends in these markets. The previous ETFs along with the Guggenheim BRIC (ARCA:EEB) make ideal choices. (For related reading, see Should You Invest In Emerging Markets?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  2. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  6. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  8. Markets

    The 5 Biggest Chinese Natural Gas Companies

    Read about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
  9. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  10. Markets

    The 5 Biggest Chinese Insurance Companies

    Read about the top Chinese insurance companies by market capitalization, and learn a little about their positions in the marketplace.
RELATED TERMS
  1. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  5. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  6. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!