IF YOU were burned by emerging market stocks last year, you
might want to give the relationship another chance in 2012.
The stocks are doing pretty well so far this year, and
analysts point to multiple reasons the gains should continue.
During the first four weeks of the year, Vanguard's MSCI
Emerging Markets, the largest emerging market stock index exchange-traded fund (ETF), was up nearly
11.6% - more than double the 5% return for the SPDR S&P 500.
The upswing indicates to investing experts that a drop of almost
20% in emerging market stocks last year wasn't a bubble bursting.
"After burning investors last year, we expect the Bric
countries to be among the top-performing markets in 2012," said Ned Davis
Research analyst Anthony Welch of the four dominant emerging markets: Brazil,
Russia, India and China.
"We think this is a good time to add to exposure
to those markets."
The stocks and the funds that invest in them are still
vulnerable to many of the same shocks that rumbled through the markets in 2011;
but analysts say a combination of positive economic trends, comparatively
strong growth, and down-to-earth prices make the recent upswing not just a
recovery bounce, but an opportunity.
To support his optimistic outlook, Welch, in a January
client report, pointed to a demonstrated ability of those countries to manage
the delicate balance between controlling inflation and maintaining economic
growth. He also pointed to signs of stabilisation among global economies.
'Good shot' at outperforming US stocks
Another draw for investors: stock prices are trading at a
discount compared to historical levels even after the recent rally, said David
Semple, Director of International Equity at Van Eck Global.
According to Semple's estimates, the group is selling at less
than 10 times forward earnings, compared to their historical range of 12 to 13
times earnings.
"That's not as cheap as the post-crisis periods of late
2008 and early 2009, but it's quite attractive," he said.
But he also cautioned that a worsening of the European debt
crisis or other developments could throw at least a temporary wrench into the
picture.
"Emerging market stocks have a good shot at
outperforming US stocks this year, but that could easily change if the Europe
situation turns into an ugly mess.
"And other potential problems - such as an
unanticipated slowdown in developed market growth, too much credit restriction
in China, and even weather-related issues that could impact food prices - are
still there," he said.
Investors are also keeping an eye on slower economic growth
in the more mature emerging market countries, especially China.
This year, the World Bank expects gross domestic product
growth in that country to come in at 8.4% compared to 9.2% last year and 10.3%
in 2010.
Still, gross domestic product growth in emerging market countries is likely to
continue to outpace expansion in the United States and Europe by a healthy
margin, according to the most recent projections from the Conference Board, a
New York-based business and economics research group funded by major
corporations.
The Conference Board said it expects growth in developed
economies to slow down from 1.6% in 2011 to 1.3% in 2012 while emerging market
growth will decelerate from 6.4% in 2011 to 5.1% this year.
Emerging market economies
The positive impact that comparatively robust emerging
market economies could have on those countries' stocks is the main reason
Weyman Gong, chief investment strategist at Signature Financial Management
allocates as much as 20% of his clients' stock portfolios to ETFs and mutual funds that focus on those regions.
For broad exposure to emerging markets he uses two ETFs,
Vanguard MSCI Emerging Markets and iShares MSCI Emerging Markets. As of Friday,
they were up 11.57% and 11.65%, respectively, so far this year.
"In the US and Europe, consumers are so highly
leveraged that they have to use money to pay off debt rather than spend,"
said Gong, whose firm manages some $2bn in assets for high net worth individuals
and families.
"Emerging market households aren't nearly as consumed
by debt, so they have more money to feed the growth engine."
Even with the group's notoriously sharp downturns and
snap-backs, Gong believes that retirees should have an allocation toward
emerging market stocks in the low teens.
"Treasury bonds may seem safe, but at current yields
they provide no protection from inflation," he said. "Putting money
under the mattress won't protect you 20 or 30 years down the road."
Mark Martiak, vice president at Premiere Financial Advisors
in New York, typically invests between 10% and 20% of his clients' equity
portfolios in emerging market securities.
Because they don't perform in sync with other asset classes
such as US stocks and bonds, he sees them as a good way to diversify.
"Emerging markets will remain the fuel for world
growth, and secular themes such as population growth and an emerging middle
class are truly powerful drivers," he said.
"But I always warn my clients that the short-term
headline risk with these securities is very real."