Emerging markets score points for investors

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Financial advisors are urging investors to put their cash into emerging markets as the economies of the developing world expand, writes Laura Cohn

For investors, 2011 was a stomach-churning roller coaster ride. Toward the end of the year in particular, stock markets around the world saw wild gyrations as investors tried to sort out the fate of the eurozone, the outlook for the US economy and the likely outcome of the US presidential election.

At one point, from August through the first part of October, the market was so volatile that the Dow Jones Industrial Average either fell or rose more than 100 points about two thirds of the trading days. The result: markets were the most volatile they’d been since the collapse of Lehman Brothers in 2008.

MARKET SHELTER

“STRATEGISTS SUGGEST INVESTING IN THE EMERGING MARKETS, POTENTIALLY THE NEW ENGINES OF GROWTH”

As the New Year begins, with so much unresolved in Europe and the US, where should investors go to seek shelter? Strategists suggest investing in the emerging markets, potentially the new engines of growth in the global economy. Developing countries used to be highly speculative bets that offered high risks, but potentially high rewards. But in the current environment, they may not be as risky as they appear. For nearly two generations, growth around the world has been driven by the West, particularly the consumer-driven US economy. But now, analysts expect growth in both the US and Europe to sink to levels below 2 percent. Economies in the emerging markets, on the other hand, are forecast to expand by 4-6 percent – or more.

That’s quite a change. “We have a global economy today where two-thirds of the growth is coming from the developing world, not from the US and not from Europe,” notes Lisa Shalett, chief investment officer for Merrill Lynch Global Wealth Management, in a webcast to investors. “People are underexposed to the paradigm shift.”

At the moment, Shalett says, investors on average have just 3 percent of their portfolios in emerging markets. But that figure should be closer to 8 percent, she advises, in a report “The Great Global Shift: New World, New Rules” coauthored with Ian Bremmer, president of the New York-based consulting firm Euroasia Group. “There’s really a need for a more global perspective,” Shalett says.

WHERE TO LOOK

So where in the developing world to look? Strategists advise starting with the so-called BRIC nations of Brazil, Russia, India and China, long the emerging markets powerhouses. Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term “BRICs” a decade ago, is now also pointing to South Korea, Turkey, Mexico and Indonesia.

Emerging markets stocks can certainly be volatile. When the Standard & Poor’s 500 stock index fell 4 percent from late summer through early fall, for instance, the MSCI Emerging Markets index declined by 14 percent, as concerns about demand for products made in the emerging world rattled investors.

But reduced demand for exports may not be as dire for these economies as investors thought at the time. Analysts expect the reliance on exports to fall in the years to come, as an expanding middle class gains purchasing power and buys high-end European and US goods.

FISCAL HEALTH

There are other compelling reasons to invest. According to the International Monetary Fund, emerging markets have healthier fiscal houses than those in the developed world. In fact, developing nations’ debts are about 35 percent of their economic output, compared to more than 100 percent for the mature markets. Fiscal health supports growth, analysts note.

If you want to invest in such markets, the best place to put a small slice of your portfolio – 8 percent or less – is into a mutual fund to diversify your risk. The T. Rowe Price Emerging Markets stock fund, which has about half its holdings in the BRICs, and the rest in the stocks of companies in countries such as South Korea and Mexico, is a good place to start.

Without spreading cash into emerging markets funds, Goldman’s O’Neill warns, investors will be missing out on any chance of near-term gains. “People who can’t get their head around the idea that these are the growth engines of the world are missing out on the biggest thing of our generation,” he says.