The Top Emerging Market Investments in 2010
by Karim Rahemtulla, Options Expert
Tuesday, December 15, 2009: Issue #1159
As the size and depth of the U.S. economic recession became apparent in 2008 and continued into 2009, we’ve seen one, four-letter acronym bandied around with increasing regularity.
BRIC.
With investors scurrying to seek better investment opportunities in other parts of the world, the so-called emerging market BRIC nations – Brazil, Russia, India and China – have barreled to the front of the line.
This was certainly the case at a very hush-hush Family Wealth Conference that I attended last month. The conference featured some of the wealthiest families in America, and their top investment choice was emerging markets…
Why the allure? Well, for investors of all stripes, America’s financial implosion has proved the importance of diversifying out of the United States. Not for unpatriotic reasons, but from the realization that a globalized economy truly offers some great opportunities elsewhere, too – and especially away from an economy and currency that have sunk.
However, the recent Dubai debt issue has served as a stark reminder that emerging markets are vulnerable to shocks, just like the United States. So what’s the deal with emerging markets? Where are they headed in 2010 and beyond?
The Risks of Emerging Market Investments
I began my career as an emerging markets analyst long before they were “en vogue.” I spent time in Turkey, Indonesia, China, Chile and Malaysia and even went to places like Timor in search of investment opportunities.
Over the years, my readers have banked profits on companies like Malaysia’s Sime Darby, Indonesia’s Telekom Indonesia and Indosat.
There’s no doubt in my mind that emerging market investments deserve to be in your portfolio. Now more so than ever, in fact. Simply put, it’s where the growth is and it’s where a lot of money will be made.
However, there are risks. We stayed away from many more companies because emerging markets, while compelling, can sometimes offer false hopes and empty promises.
In addition, the BRIC countries, with the exception of Brazil, are prone to foreign over-investment. For example, over the past five years, India has received more foreign investment funds than in the previous 10 years combined. When you’ve got huge amounts of cash plowing into a small, illiquid market, you can understand how you’d get meteoric rises and even more spectacular crashes.
But when you find the right companies in the right emerging markets, the profit potential can be lucrative.
For example, when I visited India two years ago and took a tour of some tech sector companies, it was apparent that the potential was huge. We bought Infosys (Nasdaq: INFY) when it was trading in the $30s and now are getting ready to jettison the position for a healthy profit. And it was the first-hand inspection and research that gave us the information we needed.
So where should you look in 2010 – and what should you buy?
Your BRIC Investment Plan
The key to investing in emerging markets is to buy when “blood is running in the streets” – something that happens often.
However, the BRIC countries have experienced strong returns – upwards of 60% from the lows in some cases. So the best thing to do now is to set a BRIC investment plan. For example…
- Invest according to the ones that have the most potential – and do so incrementally, not all at once.
- Your highest allocation should be split between China and Brazil.
- Your lowest allocation should be Russia.
- India should be your third-largest allocation.
- Countries like Vietnam, Malaysia, Indonesia and the Philippines should also be a part of your emerging market portfolio.
Specifically, consider investments like:
- Brazil: The WisdomTree Dreyfus Brazilian Real (NYSE: BZF)
- Russia: The Templeton Russia & Eastern European Fund (NYSE: TRF)
- India: The India Fund (NYSE: IFN)
- China: The Templeton Dragon Fund (NYSE: TDF)
And for exposure to the BRICs and the non-BRIC regions, consider the Templeton Emerging Markets Fund (NYSE: EMF).
So when should you buy? Here’s the key…
The Best Time to Buy Emerging Markets
For emerging markets funds like TDF, IFN, TRF and EMF, you must look to buy when they’re trading at a discounts to the Net Asset Value (NAV).
Preferably, a 15% to 20% discount would be the ideal level to really allocate some funds, while on the other side of the equation, you should avoid paying a premium of more than 10%.
If the investment is trading anywhere in the middle of that range, you should allocate a few percent of your total allocation for emerging markets each month, thereby buying at levels that are higher and lower than current prices.
And because they’re emerging markets, they can be raw and volatile in nature. While the Internet, better regulations and more responsible local governments have helped cut down on this, there’s still risk. Not so much that GDP growth in the respective countries will be lower, but a general lack of transparency instead, which can lead to misinformation, fraud, and big rallies and collapses.
So be prepared for big moves in either direction and have cash handy to buy in bulk. It’s usually during times of panic that emerging markets have an unblemished track record for stellar returns.
Good investing,
Karim Rahemtulla
Related Investment U Articles:
- Time to Take the “Emerging” Out of Emerging Markets
- These Countries Will Spearhead the Next Emerging Market Wave
- Emerging-Market Stocks to Rise “39 Percent”
- Are Emerging Market Bonds Safer Than T-Bills?
- Emerging Market Investing: Forget the BRIC Nations and Buy This Country Instead
9 Responses to “The Top Emerging Market Investments in 2010”
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Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
I think you better get your ETFs straight. EWJ is a Japan fund.
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Allen,
Thank you, that symbol should have been NYSE: EWZ… we have updated that in the article.
Good investing,
Investment U
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My idea is that China is No.1 choice for global investment, regarding its future growth power and trend and economy stablity. India can be No.2.
Brazil is some better this year but high risk next years, always which jump higher which down deeper, and we remember those crisis of south America in history, so it’s No.3. Russia is even more high risky for now, so would be No.4.
But people who are comfortable with high risk and just do it for a short term, Russia and Brazil are the same.
Plus don’t forget those excellent opportunities as Japan, HongKong, South Korea, Taiwan, Singapore, even Canada, Mexico…
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How can I determine when the Emerging Mkt Funds are trading at a discount of 15 to 20%, vs. a premium??? Please advise. Thx.
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Where can NAV for these funds be readily obtained. In the above list, they are only list on Yahoo Finance for BZF today.
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Bob,
There are various websites devoted to making this kind of information easier to calculate, including http://www.webcalc.net.
Thank you,
Investment U
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Thank you Karim for this post. I share your opinion about the prospect of emerging markets. What do you think about Central and Eastern European markets? They seem to be cheaper than rest of the emerging world…
I post some of my thoughts at my blog http://www.emergingindex.com/2009/12/emerging-markets-performance-and.html
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What is the best brokerage firm for sophisticated stock option trading strategies?
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We can’t actually recommend a particular broker for you, but what we can do is give you a list that you can check out:
Foremost Trading LLC (http://www.thefuturesbroker.com)
GunnAllen Financial (http://www.gunnallen.com)
Rutsen Meier Belmont Group (http://www.rmbgroup.com)
Ameritrade, Inc.: (http://www.ameritrade.com)
Charles Schwab & Company: (http://www.schwab.com)
CyberTrader: (http://www.cybertrader.com)
E*Trade: (http://www.etrade.com)
Thank you,
Investment U
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