The Time For Emerging Markets Is Now

By Aaron Levitt | December 09, 2011 AAA

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.

comments powered by Disqus
Related Analysis
  1. Q3: Not Amazing Nor Disappointing - Ahead of Wall Street
    Stock Analysis

    Q3: Not Amazing Nor Disappointing - Ahead of Wall Street

  2. Q3 Earnings Scorecard as of October 16, 2014 - Earnings Trends
    Stock Analysis

    Q3 Earnings Scorecard as of October 16, 2014 - Earnings Trends

  3. Emerging Markets Are Ready For A Big Rebound
    Investing

    Emerging Markets Are Ready For A Big Rebound

  4. This Beaten-Down Sector is Ready for Its Next Big Rebound
    Investing

    This Beaten-Down Sector is Ready for Its Next Big Rebound

  5. Can Finance Sector Surprise Q3 Earnings Season? - Industry Outlook
    Stock Analysis

    Can Finance Sector Surprise Q3 Earnings Season? - Industry Outlook

Trading Center