As Economies Slump, How to Play Emerging Markets

Despite the looming slowdown and possible recession in global economies, the emerging markets trade continues to survive.

David Karp / AP

True, investors may have to be more selective going forward, but new safer-play options for investors help reduce risk.

Geopolitical troubles in the former Soviet bloc countries could spell trouble for the bustling Russian economies, but other areas of growth, particularly in Southern Asian countries and Brazil, still present opportunities.

"The macro issues affecting emerging market investments are some of the same ones that are affecting emerged market investing decisions, albeit with slightly different impact," says Uri Landesman, head of global growth strategies at ING Investment Management. "How deep is the recession here? How long is the recession here? A short, shallow recession would benefit; a deep, extended one would hurt."

That's because the foreign markets that are just now reaping the fruits of capitalism are highly dependent on US demand for their products. Those countries that can continue to produce products that American consumers want should still do well.

Also, one specific factor that could boost emerging markets is the resurgence of the American dollar, which adds a new dynamic to the global trade.

"From a straight currency translation, it's a positive for them. They're generating costs in a depreciating currency and generating revenues in a positive currency," Landesman says. "If there is a coupling and the world literally mirrors the US recession, albeit with a lag of six to 12 months depending on where you are, that's not a particularly positive outlook for emerging markets."

"If on the other hand, US demand snaps back and China bounces back quickly, then emerging markets could be OK."

How to Play Emerging Markets

Landesman says the best way to take advantage of growth in the so-called BRIC nations of Brazil, Russia, India and China, is selectively, by hiring a money manager familiar with the stock markets in those countries.

But failing that, retail investors can take advantage of a wide array of exchange-traded funds, or ETFs, that mirror broad stock market movements in the individual nations, or emerging markets as a whole.

China, for instance, can be played using the iShares FTSE/Xinhua China 25 Index

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[FXI  Loading...      ()   ] ETF. The fund is heavily traded, with an average daily volume of more than 19 million shares, and presents value at this point as it is near its 52-week lows.

Landesman is interested now in not only China but also Taiwan.

For a look at how to invest in Bangladesh, check out the video at left.

"I think there is a big story there," he says. "Chinese-Taiwanese relations seem to be at an all-time peak."

Taiwan itself does have multiple iShares ETFs, including the MSCI Taiwan

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[ITWN  Loading...      ()   ] fund on the London Stock Exchange, though none that trade on American exchanges.

Landesman encourages the play of companies in Taiwan that do large amounts of business in China as increasing amounts of money change hands between the long-time adversaries.