In this week's cover story, Barron's looks into how the nature of how emerging markets ( EEM , quote ) may be changing.
[caption align="alignright" caption="State-owned companies from the BRICs like Petrobras may not be the best way to invest in emerging markets"] [/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 ).