As problems facing the global economic picture began to materialize during 2011, investors took to the task of removing risk from their portfolios. A variety of asset classes saw their market indexes and share prices plummet. Investors, once again, fled to the relative safety of bonds and cash. To that end, stocks within riskier emerging market economies put up one of their worst performances in recent times. The broad based iShares MSCI Emerging Markets Index (ARCA:EEM) returned around a -21% throughout 2011. However, as the New Year has kicked off, stocks within developing nations have been on a tear, and analysts point to an assortment of reasons the gains should continue throughout the year. For investors, now could be the best time to add or increase exposure to the countries. (For related reading, see Evaluating Country Risk For International Investing.)
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After producing large negative returns for the previous year, emerging market nations are already seeing great gains in 2012. The MSCI Index is up roughly 14% year to date, outpacing the approximate 7% gain for the S&P 500. Around $4.3 billion in new investor money flooded into emerging market-based equity mutual funds during the last week of the month, with investor interest reaching a 52-week high.
There are plenty of reasons for the surge. Policy makers within Europe agreed to tighter budget controls, via a fiscal-discipline treaty. The pact allows for sanctions on high-deficit states and requires members to enact laws limiting budget shortfalls. These plans, plus the positive jobs, manufacturing and consumer confidence numbers from the United States show signs of stabilization among global economies. The Federal Reserve's recent statements about keeping interest rates at record lows have also fueled speculation about a third round of monetary easing. (For more information, see Forces Behind Interest Rates.)
As inflation across the emerging world continues to cool, a range of developing market governments have begun the process of cutting borrowing costs to spur growth. From Brazil and Chile to the Philippines to Thailand, which have all seen slower inflationary pressures over the last few months. This has allowed policy makers to ease the monetary policy and jump start growth once again. Overall, analysts predict that this growth will be sustained throughout the year, built on the backs of positive internal economic trends, strong growth and historically low prices. Emerging market stocks are currently selling for around 10 times forward earnings. This is below their historical average of 12 to 13. Overall, the Conference Board estimates that emerging markets will see gross domestic product growth of around 5.1% this year.
With a variety of positives firmly in the emerging market countries favor, investors may want to consider upping their exposure to the nations. Aside from the previously mentioned iShares fund, the Vanguard MSCI Emerging Markets ETF (ARCA:VWO) is one of the largest and most liquid ways to add a dose of emerging market stocks. The exchange-traded fund (ETF) spreads its approximate $54 billion, in assets, among 908 different firms including Brazilian mining giant Vale (NYSE:VALE) and tech staple Taiwan Semiconductor (NYSE:TSM). The ETF charges one of the lowest expense ratios in the sector at 0.22%. Equally earning points on the cheapness scale, is the Schwab Emerging Markets Equity (ARCA:SCHE) at 0.25%.
Analysts at Ned Davis Research say the four nations of Brazil, Russia, India and China (BRIC) will be "among the top-performing markets in 2012." Overall, the BRICs have the ability to manage inflation and maintain economic growth. To that end, the Guggenheim BRIC (ARCA:EEB) allows investors to hone in on the BRIC. The ETF tracks 90 different firms, with the largest weightings towards Brazil and China. Investors may also want to consider boosting their exposure to India directly. The nation slumps the worst out of the BRICs and represents a real deep value compared to the other three countries. So far, India is on pace to have one of its best performing years ever. The PowerShares India (ARCA:PIN) allows investors to tap into that outperformance. (To learn more on ETFs, read Advantages And Disadvantages Of ETFs.)
The Bottom Line
After putting up some of the worst performances in recent years, stocks within emerging market nations are having a field day. What's more important is that an array of factors point to the countries continued outperformance throughout 2012. For investors, now could be a great time to add or increase their exposure. The previous ETFs, along with the SPDR S&P Emerging Markets (ARCA:GMM), make great broad ways to do that. (For more information, read 5 Common Misconceptions About ETFs)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.