Since the markets turned up in March, investors’ appetite for risk has returned — and in the case of emerging markets, it is voracious. So far this year, investors have poured nearly $30 billion into emerging-markets stock funds. Last year, investors pulled nearly $50 billion out of those markets. China claims the lion’s share of inflows, with Brazil a close second.
For those prescient enough to have bet on emerging markets, the payoff has already been huge: The iShares MSCI Emerging Markets index, reflecting 22 developing markets, was recently up 27 percent this year, after sinking 50 percent last year. Many individual markets are up more: China’s is up 31 percent; Brazil, 44 percent, and India, 43 percent.
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Can those gains continue? Clearly, emerging-markets stocks aren’t the bargains they were last fall, when stocks in the MSCI index sold at about six times earnings, on average. Price-earnings ratios are now closer to 14, about where they stand in developed markets.
For investors with three to five years to spare, emerging markets have much to offer — such as fast-growing economies. The International Monetary Fund projects little to no growth in the United States and Europe next year, but it predicts China will grow 8.5 percent; India, 6.5 percent; and Brazil and Mexico, about 3 percent each. Many emerging markets are fiscally strong, bolstered by relatively debt-free consumers striving for a better standard of living, plus a financial sector ready to bankroll the march into the middle class.
Janus Worldwide had no emerging-markets investments when Laurent Saltiel took over the fund in April. Now Saltiel has a 15 percent stake. Like others, he sees opportunity in Brazil, India and China. In Brazil, falling interest rates are a boon to consumer and business lending. In India, a newly elected, pro-business government should stimulate investment. The focus in China has shifted from exports to consumers, with plenty of government support. Russia — the other component of the so-called BRIC countries — is less attractive, with a poor track record of corporate governance.
Investors should consider putting up to 10 percent of their stock assets into emerging markets, says investment adviser Christopher Cordaro of RegentAtlantic. Try a diversified exchange-traded fund — such as Vanguard Emerging Markets (symbol VWO) — or a mutual fund, such as T. Rowe Price Emerging Markets (PRMSX) or Lazard Emerging Markets Open (LZOEX).
Don’t overlook funds you may already own, such as Dodge & Cox International, with nearly 22 percent of assets in emerging markets. And consider U.S. companies with international operations — such as beauty-products giant Avon Products, which derives more than 70 percent of its sales overseas.
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