US Stocks Got You Down? Try the Emerging Markets

Jeff Cox, |Special to

As the US stock market struggles through a credit-induced malaise, investors increasingly are turning to emerging markets to diversify portfolios and cash in on those countries' growing economies.

China Trade
Reed Saxon

From Russia to Oman, from Brazil to Japan, putting money in emerging markets has gone from a high-risk proposition for professionals to a mainstay of investing fundamentals. Demand for food and fuel as well as clothing and cars has pushed countries once crushed by poverty and repressive, anti-open market governments onto the world's business stage.

"Over the coming weeks and months, a number of interesting entry points will emerge for a number of these developing countries," Nick Chamie, chief emerging markets strategist at RBC Capital Markets, said on CNBC.

Chamie sees opportunity in the so-called BRIC countries -- Brazil, Russia, India and China -- as well as Mexico, Chile and Turkey as plays over the longer term, which is where he says smart emerging market investors focus.

Franklin Templeton mutual funds that hold individual stocks in BRIC nations were among the best performers in the first quarter.

Overseas Investment Hunt

"Investors in emerging markets usually go in with the long-term mindset," Chamie says. "So with a five- to 10-year time horizon, many investors tend to do quite well in emerging markets and I think that will continue to be the case."

Mexico and Chile get high marks, according to Chamie, for bringing in sharp financial minds to run their economies. Brazil, meanwhile, has maintained strong growth levels while controlling inflation. He says India "is starting to turn the corner" while Russia will be a good investment target because of rising oil prices.

Some of the Pacific Rim countries also have attracted widespread attention, especially China with its rising middle class and demand for products typically associated with Western culture.

For those looking to invest in China, that means targeting three C's, according to Tony Sagami of Harvest Advisors: Construction, cargo and "Chubbies," which are that nation's version of the young, urban professionals known in the US as "yuppies."

While emerging markets investors traditionally flock to mutual funds and similar vehicles, Sagami looks at individual companies that trade on US exchanges for exposure to the Chinese markets.

He favors Yum! Brands , the ubiquitous owner of KFC, Pizza Hut, Taco Bell and other fast-food joints. The Chinese, eager to emulate the American dream of a pizza in every oven, are big customers of Yum restaurants.

Also, Sagami likes China Life Insurance, a company ready to bounce off its recent low in March, as well as China Mobile , which he calls "one of the very, very best telecommunication stocks you could own in the world."

"I think the biggest misconception is they think it's difficult to invest in emerging markets, and that's not true anymore because there are so many international companies listed on American exchanges," says Tony Sagami of Harvest Advisors. "Most people think they need to have an exotic trading account and a broker in other countries to invest overseas, but you don't."

Look For Experience -- and Boots on the Ground

Yet most investment pros counsel caution when it comes to emerging markets investments on a broader scale than individual stocks. And they say mutual funds and exchange-traded funds are the best way to play emerging markets.

Those looking to play China with an ETF can try the FXI, which is the iShares index fund correlated to the FTSI/Xinhua China 25 index and is 35 percent off its 52-week high.

In mutual funds, there are a variety of issues that track the movement of emerging markets. Leaders for the first quarter were the ProFunds Emerging Markets Profund I  and the ProFunds S , both of which returned more than 31 percent; Direxion Emerging Markets Bull, which returned 25.3 percent; and the Templeton BRIC Fund A and Templeton BRIC Fund C.

Best EM Mutual Fund Plays

When playing emerging markets, experts advise investing only through firms that have feet on the ground in the markets themselves, rather than someone in a remote location who may not be intimately familiar with the vagaries of the international markets.

After all, the countries are considered emerging because they have not yet fully developed and are subject to the whims of politics and the realities of continuing internal strife that can make investing a tricky proposition.

"The reason that we suggest a very experienced portfolio manager is that they have been through crises before. They know how to react. They typically have analysts on the ground in different countries," says Quincy Krosby, chief investment strategist at The Hartford.

"Emerging markets are also subject to selloffs for political reasons. That's why they're called emerging markets. These selloffs can be swift and on a secular basis."

Yet Krosby says no investor these days can be considered diversified without emerging markets exposure.

"Emerging markets are going to be an extremely important part of any American portfolio," she says. "That's where the growth is, not just in terms of population and GDP, but the companies that are going to be some of the largest where market capitalization is concerned over the next 10 or 15 years will come from emerging markets, particularly from the Pacific rim."

There also is a growing level of interest in Middle Eastern countries, specifically those that make up the Gulf Cooperative Council -- Saudi Arabia, Bahrain, Qatar, Kuwait, the United Arab Emirates and Oman.

Bruce Fenton, president of Atlantic Financial, finds parallels between the Arab world and China, where 15 years ago it would have been unthinkable as a magnet for capitalist investment.

As things stand, there are few opportunities for retail investors in GCC countries, though that could change soon.

"I think the time is right where American investors, be they retail or institutional, are looking elsewhere. The US market has contributed to that," Fenton says. "They're looking for an area that's growing, they're looking for something they haven't heard a lot about."

Atlantic Financial is about to offer a fund that trades in Mideast business but, Fenton says, will be available only to institutional investors with $1 million minimum to get in. But more opportunities could be on the way.

"There's no reason a mutual fund couldn't be done," he says.

Matthew Tuttle, president of Tuttle Wealth Management, takes a more tested approach, though, and favors the BRIC nations. In describing his approach, he uses a strategy employed by hockey legend Wayne Gretzky, who said he focused not on where the puck was, but where it was going to be.

"At some point, depending on whose estimate you look at, those are going to be the biggest economies out there," Tuttle says. "That's where the puck is going to be. You cannot ignore those countries."