If Charles Dickens had written the economic forecast for 2011, he might have called it A Tale of Two Worlds. And though the title would have echoed the name of his most famous novel, Dickens would have turned its primary theme on its head. Today, citizens of developed countries are facing the worst of times, and those in many emerging nations are enjoying the best of times.
It's a revolutionary change that smart investors shouldn't ignore. Robert Smith, manager of T. Rowe Price International Stock Fund, sums up the role reversal this way: "Do you want to sell to a consumer in Brazil or China who has a job, no debt and is experiencing double-digit annual wage growth, or to a consumer in the U.S. or Western Europe who isn't working -- or whose wages aren't growing if they are employed -- and who is paying down debt?"
The answer is obvious, but it raises two other questions: After the terrific run emerging-markets stocks have enjoyed already, are they overpriced? And what's the best way to profit from them?
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
No question, emerging markets have rocked. Over the past year through November 5, the MSCI Emerging Markets index gained 27.3%, compared with 11.6% for the MSCI EAFE index (which tracks stocks in developed foreign markets) and 17.3% for Standard & Poor's 500-stock index.
Although markets in some countries may be overheated, emerging markets as a whole aren't out of line. Alec Young, S&P's foreign-stock strategist, says emerging-markets stocks trade, on average, at less than 12 times estimated 2011 earnings. That's on par with overseas developed markets, and it's less than the price-earnings ratio of U.S. stocks, which trade at 13 times forecasted 2011 profits.
Safer Ways to Play
Investors are typically willing to accept high price-earnings ratios for fast-growing companies. One reason developing-markets stocks are cheaper than U.S. stocks is that they are more volatile. Moreover, emerging markets rely on developed markets for customers and financing, and that leaves them at the mercy of nations that are often shakier than they are. Talk about ironic. In fact, emerging countries may limit the flow of easy money from developed markets so that their economies don't suffer the same types of credit bubbles that hurt established nations.
That gets us back to the question of the best ways to profit from emerging markets. Price's Smith likes firms in developed nations that appeal to emerging-markets consumers. For example, his fund owns Richemont, a Swiss luxury-goods company that books 40% of its sales in emerging markets.
You can also make a less-dramatic case for foreign stocks that don't have emerging-markets ties. Charles de Vaulx, co-manager of IVA International Fund, says that many European stocks have lagged since markets bottomed in March 2009.
So how do you make sure you're well positioned to profit internationally? You may already be covered. Many international funds have significant exposure to emerging markets -- and so do nominally domestic funds.
If you don't have at least 30% of your stock holdings in foreign names -- with at least one-third of that in companies tied directly or indirectly to emerging markets -- you should bring your allocation up to that level. The best way to boost your holdings is to buy T. Rowe Price Emerging Markets Stock Fund (symbol PRMSX) or the low-cost, exchange-traded Vanguard Emerging Markets ETF (VWO).
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
White House Probes Tracking Tech That Monitors Workers’ Productivity: Kiplinger Economic ForecastsEconomic Forecasts White House probes tracking tech that monitors workers’ productivity: Kiplinger Economic Forecasts
-
The 5 Best Actively Managed Fidelity Funds to Buy and Holdmutual funds Sometimes it's best to leave the driving to the pros – and these actively managed Fidelity funds do just that, at low costs to boot.
-
The 12 Best Bear Market ETFs to Buy NowETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
-
Investing in Emerging Markets Still Holds PromiseEmerging markets have been hit hard in recent years, but investors should consider their long runway for potential growth.
-
Don't Give Up on the Eurozonemutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
-
Stocks: Winners and Losers from the Strong DollarForeign Stocks & Emerging Markets The greenback’s rise may hurt companies with a global footprint, but benefit those that depend on imports.
-
Vanguard Global ESG Select Stock Profits from ESG Leadersmutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
-
Kip ETF 20: What's In, What's Out and WhyKip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
