5 Funds to Catch a Rally in Emerging Markets

The stocks are cheap, and growth prospects for developing nations dwarf those of established countries.

The emerging-markets “anthem” is as familiar as “We Are the Champions” at sports events: Developing nations, such as China, India and Brazil, are growing faster than the rest of the world, and they stand to deliver outsize stock gains as they industrialize and their middle classes grow. But in recent years, the song has been off-key. Over the past five years, the MSCI Emerging Markets index was essentially flat, compared with a 1.1% annualized gain for Standard & Poor’s 500-stock index. In the past year, emerging-markets stocks earned 24.6% and the S&P 500 returned 33.0% (all returns are through October 4).

In part, the bum performance is collateral damage from economic woes elsewhere. Over the past couple of years, many asset classes around the globe have been whipsawed by a phenomenon known as risk-on, risk-off trading. When investors learn of positive developments about, say, the European debt crisis, they scoop up risky investments, such as emerging-markets stocks, in a fit of optimism. When headlines bear bad news, investors sell their risky holdings. “The recent precipitous declines have been driven predominantly by European and other worldwide economic fears,” says Howard Schwab, co-manager of Driehaus Emerging Markets Growth Fund.

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Elizabeth Leary
Contributing Editor, Kiplinger's Personal Finance
Elizabeth Leary (née Ody) first joined Kiplinger in 2006 as a reporter, and has held various positions on staff and as a contributor in the years since. Her writing has also appeared in Barron's, BloombergBusinessweek, The Washington Post and other outlets.