It was the turn of the millennium when I boarded a train
headed to a place that had just become its own country seven
years before. I would be spending Y2K in the U.S. embassy
overlooking the city of Prague in the Czech Republic.
The country was young and not well known, but its growth
potential would turn out to be tremendous.
I spent time touring the incredible city. I walked over the
Charles Bridge -- the most important connection to Prague Castle
and the city's old town -- and admired its architecture and
The most impressive thing was the surprising lack of tourists.
It was like I had the city all to myself. Most people still
called it Czechoslovakia. At the time, Prague was Eastern
Europe's hidden gem.
Fast-forward six years to when I returned... and it was a
completely different city.
The Charles Bridge was completely packed, the line to enter
Prague Castle was a 30-minute wait, and the locals now spoke
German and English on top of their native tongue. Prague was no
longer Eastern Europe's secret. It had developed into a vibrant
city booming with people from all over the world. The Czech
Republic had officially reached developed country status in less
than 13 years since it began in 1993.
In the six short years between my visits to Prague, the Czech
Republic's GDP exploded from $58.8 billion in 2000 to $148.3
billion in 2006, peaking at $225.4 billion in 2008.
It's the type of GDP growth that we all dream about when
investing in emerging markets.
You see, investors are attracted to the potential growth of
GDP in emerging-market countries as they expect it to drive
strong equity returns.
For instance, during the Czech Republic's incredible six-year
stretch of economic growth (from 2000 to 2006), the country's
stock index soared over 600%.
This wasn't an isolated instance. For instance, two of the
Czech Republic's European neighbors, Hungary and the Slovak
Republic, also had booming GDPs that correlated with surging
stock indices over the same time period:
GDP Growth From 2000-2008
Now take a look at their respective indexes for the same
Stocks For Emerging Markets Soared As Their GDP
As you can see, explosive GDP translated directly into each
country's stock exchange. When GDP grows, investors become more
confident in that country, bringing a surge of foreign
In other words, explosive GDP growth can lead to exponential
For example, had you invested in the Prague stock exchange in
1999 and held until the Czech Republic reached its peak GDP, you
would have booked a gain of just over 600%, compared with the
S&P 500's gain of 34% over the same period. And even though
Czech stocks were hit hard during the financial crisis, you still
would have gained 260% (compared with the S&P's 95%) if you
had held through to today:
The bottom line: Watching the GDP growth of emerging markets
can be a great indicator as to how its stock market is going to
In the six short years between my visits to
Prague, the Czech Republic's GDP exploded from $58.8
billion in 2000 to $148.3 billion in 2006, peaking at
$225.4 billion in 2008.
And lucky for investors, emerging markets are expected to see
especially large gains in GDP this year. In fact, the
International Monetary Fund (
) estimates that emerging-market GDP growth will average almost
6% in 2014 -- dwarfing the U.S.' roughly 2% GDP growth in recent
years. IMF even expects some areas, like developing Asia
(countries like Indonesia, Thailand and Malaysia), to expand more
After the U.S. market's historic 30% rally in 2013 and with
U.S. indices trading at all-time highs, U.S. stocks are starting
to look expensive. Investors are beginning to look elsewhere, and
the one place that's especially ripe for growth is emerging
markets. It may be just the right time to jump back in.
iShares Emerging Markets Dividend ETF (NYSE:
provides the opportunity to capitalize on emerging markets
(particularly in developing Asia). This exchange-traded fund
invests primarily in small and mid-cap companies in emerging
markets with particular exposure to greater Asia (countries like
Taiwan and South Korea) and developing Asia.
Currently yielding 4.65%, DVYE looks for some of the more
established companies in emerging markets, paying special
attention to companies that pay dividends. To be included in the
ETF, companies must have paid dividends over the past three
years, which helps weed out riskier companies. This strategy
helps avoid the large price fluctuations often found when
investing in emerging markets.
Risks to Consider:
As with all investing opportunities, there is a considerable
amount of risk associated when investing in emerging markets.
When foreign investment floods a developing country, it often
leads to political tension or currency risk.
Action to Take -->
For those investors looking to allocate a small portion of their
portfolios toward emerging markets, DVYE provides a great
opportunity to generate income while skirting some of the
potential risks associated with those markets.
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