Markets

Emerging Markets Post Bigger Gains Than US So Far

While the January rally in U.S. stocks may have looked good, investors would have found even more to like in foreign markets.

India Traders
AP

Despite all of the geopolitical storm cloudscircling, indexes in Argentina, Hungary and throughout the so-called BRIC nations — Brazil, Russia, India and China — outperformed their American counterparts, in many cases by large margins.

The big January surges came after many emerging economies suffered through bear markets in 2011.

But that's been the case pretty much across the board in the early stages of 2012 — everything that didn't work last year has worked this year and vice versa.

"Whatever goes down the most the year before usually comes up the most," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, Pa. "Those markets were losing 20, 25 percent last year. There are some interesting places to be in the international world."

Argentina has posted the biggest stock market gains of the year, rising 15 percent, while stocks in Hungary are up 13.6 percent, according to data compiled by Bespoke Investment Group. Bangladesh, which is off nearly 17 percent, and Sri Lanka, down 5.75 percent, are the worst global performers.

Russia leads the BRICs with a 13.4 percent, while even stocks in debt-ravaged Greece have risen 9.6 percent.

For investors, there are a variety of ways to play the foreign markets — either by buying companies based overseas or through multinationals that do business with growing economies, to name two.

But the route taken by many investors nowadays, as they look for foreign exposure while also getting dividend growth and diversification, is through the plethora of exchange-traded funds that do a pretty good job of tracking growth in their designated nations and combine the various strategies.

Baum, for instance, likes the iShares MSCI Pacific ex-Japan ETF . The fund sounds like a mouthful but simply tracks stocks in Australia, Hong Kong, New Zealand and Singapore — the Pacific, without including slow-growth Japan.

Importantly, the fund also pays a handsome dividend at 4.4 percent and carries a three-star Morningstar rating.

"You can get that side of the world, and while you're waiting for it to repair itself and get better at least you're getting paid 4 percent," Baum says. "It makes sense from an entire asset allocation standpoint for investors to have a piece of emerging and non-emerging countries."

Investors also can choose country-specific ETFs.

India stocks have surged 11.5 percent so far, but its ETF, the Barclays iPath MSCI Indiafund, is actually the best-performing of all its single-country piers, gaining 21.3 percent for the year. The fund has outperformed the broader Indian index as it carries the top 68 stocks in the country.

Similarly, Brazil's ETF, the iShares MSCI Brazil Index has jumped 15.4 percent in 2012 while the broader market is up 10.8 percent.

For investors who favor multinationals — even if they don't want direct exposure to other countries — following the foreign markets is a helpful tool to analyze those big conglomerates.

"The story for the emerging markets is clearly they decelerated, but you have governments that are easing policies," says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles.

"They spent 2011 fighting inflation and tightening, and now they're embarking on central-bank easing and that's seen as providing a boost to those economies and those underlying markets," he adds. "Domestic investors who are in large multinational companies have to know what's going on."

Many investors, though, remain cautious about foreign markets due to contagion fears regarding the European debt crisisand global economic slowdown.

"All of the foreign markets took a beating in 2011. A lot of retail investors are gun shy. But fundamentals haven't changed for those countries, other than they have more inflation they do here in the U.S.," says Emily Sanders, president of Sanders Financial Management in Atlanta. "Even with slower growth rates, like the ones we saw back in the 2009 era, there are still places that we like."

In addition to stocks, Sanders also likes fixed income funds for countries such as Russia, Brazil and Turkey.

As for equities, she likes the iShares MSCI Singapore Index, which tracks the Singapore stock market through the use of American Depositary Receipts, or ADRs. The Singapore market is up 10.2 percent this year.

She also favors Israeli stocks as well as foreign-based companies like Siemens AG.

To be sure, there are risks to investing outside the U.S.

European debt is one obvious peril, reflecting that global sentiment is still largely tied to the events in Greece and elsewhere. Monday's tradingreflected that fear, with many of the foreign indexes dropping even more than the U.S. market.

"There is going to be no decoupling per se," says Michael Cohn, chief market strategist at Global Arena Asset Management in New York. "But I have no problem with individual businesses in those countries — just like I'd have no problem picking individual businesses in Europe or the United States."