Emerging markets: Changing of the Guard, and Changing of the Approach?


In this week's cover story, Barron's looks into how the nature of how emerging markets ( EEM , quote ) may be changing.

[caption id="attachment_74861" align="alignright" width="300" caption="State-owned companies from the BRICs like Petrobras may not be the best way to invest in emerging markets"] Image courtesy Petrobras News Agency: http://www.agenciapetrobras.com.br [/caption]

At Emerging Money, we have written extensively about the misleading nature of the emerging markets index; it skews investors towards parts of the EM world that appear optically cheap, but are actually value traps -- for example, Gazprom ( OGZPY , quote ) and Petrobras ( PBR , quote ).

Recently, the BRICs have been death traps; the places that investors have really wanted to love -- like Brazil, which is down 40% from its highs in April 2011 in USD terms -- have been cruel places to park long term capital.

That being said, give Barron's its props for bringing this to the attention of the masses, as many have missed a strong rally in EM in the last 2 years that existed below the surface outside of the traditional emerging market destinations.  The Philippines ( EPHE , quote ) --an emerging market I love -- is up 40% over the last year, and Turkey ( TUR , quote ) has been the best performing market in the world over the last year.

However, BRICs make up 43% of the benchmark emerging markets index. These countries are too exposed to the cyclical nature of commodities. The other big drawback to investing in the BRICs is that state-controlled companies are becoming more of a corporate governance risk.  These state-owned companies are actually growing their influence: an issue that should have been addressed 10 years ago.

The increasingly wealthy emerging markets consumer does exist, but this trend is better exploited in other countries: namely, where there is a true consumer economy and growing consumption that is fostered by more market-friendly governments.  The best places that have these economic conditions, that have a set of quality companies, and that have the most lucrative investment opportunities are:  Colombia ( GXG , quote ), Indonesia ( IDX , quote ), Turkey, Philippines, and even Mexico ( EWW , quote ).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , International , Stocks

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