Emerging Market Profits
Capitalize on the World's Fastest-Growing Economies with these ETFs

Any investor with even a passive interest in foreign stocks has probably heard great things about the world's emerging markets. Given their hefty triple-digit returns in recent years and the likelihood of more gains on the horizon, it's not surprising that this corner of the market has captured so much attention lately. 

(1.)  Looking Abroad

In years past, most of the world's stock market value was locked up in the United States. However, trillions of dollars of market wealth have been created overseas in the past decade, and there are now actually more opportunities outside our borders than within.

We may have hundreds of great companies here in the U.S. to choose from -- but there are literally thousands elsewhere around the world. Take banks, for example. In terms of assets, seven of the top ten banks in the world are foreign-based companies. And the story is similar across most other industries, from retailers to steelmakers to electronics manufacturers -- many of the top players and future bellwethers are located outside the U.S.

And aside from greatly expanding the pool of potential investment ideas, there are plenty of other reasons to look overseas in search of gains. Income-oriented investors can find better interest rate environments and higher yields. Value hunters can go bargain hunting in markets that offer extremely compelling valuation levels. And growth hounds can place their bets in countries where robust economic growth is driving corporate profits sharply higher.

Clearly, there is something to be said for casting a wider net, and those that have done so have been well rewarded. Over the past 15 years, the U.S. has not once been the top-performing stock market in any given calendar year. In 2006, for example, it failed to break the top ten -- the +14% return of the S&P 500 wasn't even within shouting distance of Venezuela's impressive +156% gain or the currency-aided +912% surge that investors saw in Zimbabwe.

Over the past five years, U.S. stocks (as measured by the S&P 500) have delivered average gains of about +11% per year. While that return is respectable, it lags most foreign benchmarks -- stocks have jumped +16% per year in Pacific Asia, +19% per year in Europe, and +39% per year in Latin America over the same time frame.

As economic expansion in relatively undeveloped nations like China and India continues to unfold, we have witnessed the creation of a flourishing middle class and dramatic growth in consumer spending power. At the same time, with a plentiful pool of comparatively inexpensive laborers, many of these countries have also become major manufacturing hubs for everything from plastics to toys to semiconductors. Others, meanwhile, are commodity-rich nations that have been busily exporting billions of dollars worth of oil, copper, iron ore, and other natural resources around the world.

While the story might change from country to country, the overall economic outlook for the developing world is bright. Naturally, this heady growth should translate into tremendous gains for investors in the years ahead. Already, many of the nascent companies on these exchanges have delivered powerful gains. But considering these secular economic growth phases can take decades to play out, there is still time to get in on the ground floor. 

(2.)  Riding the Wave

In the late 19th century, England was the world's preeminent superpower. At the time, many of the world's largest companies were British, and the London Stock Exchange was far and away the world's largest. However, by 1900 economic growth in the highly developed U.K. had already begun to slow -- the natural consequence of a maturing economy. At the same time, the U.S. was rapidly catching up, evolving from a largely agrarian society into a manufacturing and financial powerhouse.

Fast forward 100 years, and England remains a highly advanced country with a good standard of living, but it is no longer the superpower it once was. Meanwhile, the U.S. has grown steadily to become the most dominant economy on Earth -- with a staggering Gross Domestic Product (GDP) in excess of $13 trillion.

But like Britain in 1900, the U.S. is now advanced and fully industrialized. As a result, it's unlikely that the country can continue to grow at the same pace it has over the past century. In fact, annual growth of just +3% to 4% is now considered robust for such a large, developed economy.

However, similar to America at the turn of the century, many emerging markets are still very early in their development cycle and are just now beginning to hit their stride. And just as U.S. stocks have created hundreds of billions in wealth over the past few decades, dominant companies in the world's developing markets could do the same in the coming years. 

This growth will be fueled by a number of different factors. Asian economies, for example, are becoming important bases for global manufacturing operations. In China, major multinational companies are taking advantage of low labor costs by moving manufacturing jobs to the country.

Meanwhile, infrastructure throughout Asia continues to grow, and that rapid expansion has led to high demand for basic materials like copper, steel, and energy (oil and natural gas). Prices for these basic commodities are rising to levels unseen in two decades, and as a result, commodity-rich economies across Latin America are benefiting.

At the same time, many emerging markets are enjoying a booming export business. South Korea, for example, is a world-class manufacturer of ships and automobiles, as well as semiconductors, wireless equipment, and other electronics. Driven by strong demand from nearby China as well as consumers in the Western world, the exportation of these products has surged, pushing the country's GDP above $1 trillion. 

Finally, many emerging markets are also benefiting from regulatory reforms, cross-border trade, and loose monetary policy. And, of course, as the disposable incomes of these densely populated regions continue to rise, we expect these nations to see sustained growth in consumer spending power in the years ahead, boosting earnings for retailers, financial services providers, and a host of other industry groups. 

Overall, mature economies like England and the Unites States are growing at around +3% annually, while those in places like Russia, India, China and Hong Kong are expanding more than twice as fast. Going forward, this growth should translate into superior corporate profitability and impressive gains for investors.  

(3.)  An Extra $4 Million

With impressive stock market returns of +47% in Spain, +48% in India, +66% in Morocco, and +156% in China last year, it's not surprising that emerging markets have become all the rage lately. And given the growth story behind these countries, we expect to see more money flow into these markets going forward.

However, keep in mind that these stocks can be quite volatile. And given their recent run-up, anything from inflationary pressures to rising interest rates to signs of a global economic cool-down could send them tumbling. Investors should also note that emerging markets investing carries other unique risks, such as political upheaval, regulatory changes, and currency fluctuations. And unlike domestic stocks, the SEC isn't there to ensure that these companies disclose their financial results in a timely and accurate manner, so accounting questions and corporate governance concerns might also pop up from time to time.

That being said, despite their occasional price swings, these stocks have delivered stellar gains over the past few decades. According to a study by Vanguard covering the period from 1973 to 2003, emerging markets stocks produced average annualized gains of nearly +15%, easily outpacing the +11.5% return of those in the U.S.

To put those numbers into perspective, consider this: a $100,000 investment earning +11.5% for 30 years would grow to about $2.6 million -- a very respectable sum. However, if you were able to invest that same $100,000 at +15% per year, then you'd end up with over $6.6 million -- an improvement of $4 million.

Of course, past performance does not guarantee future results, but given the factors discussed above, we believe emerging markets stocks will continue to post better-than-average returns over the long haul. And in the text that follows, we'll profile three of our favorites.

---

I sincerely hope you've enjoyed today's report -- Emerging Market Profits.

Nathan Slaughter
Editor
The ETF Authority
StreetAuthority.com
http://www.StreetAuthority.com

StreetAuthority LLC
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614