Tapping Into the Strength of Emerging Markets

One of the questions we're getting from investors is "What about emerging markets?" It seems that while the U.S. and Europe and Japan continue to struggle, the EM countries continue to march along. And I think this is a trend that's likely to continue for a number of years. So, as an investor, how do you take advantage of that?

There are two main ways to think about this, one of which is a direct investment in emerging markets. Actually going out there and either through owning the stocks directly or through a fund, having exposure to countries that are based, that are domiciled in emerging markets.

I think this does make sense for a number of investors because not only are these countries likely to grow faster over the longer term but they also provide some diversification in the portfolio. Their economies are in a different stage of the economic cycle, they often zig when the developed world zags. And from a portfolio construction standpoint, that's a good thing.

Another reason that investors may want to consider a direct investment in emerging markets today is that on a valuation basis, they're actually quite cheap.

Currently, EM stocks trade at about a 25% or greater discount than the developed world. At least historically, that has represented a good entry point and again another reason to consider that direct investment today.

The second way to think about emerging markets or getting exposure to emerging markets is by owning larger companies that are based in the United States. Now why larger companies? Well, the large and the mega cap companies derive more of their revenue from overseas sales and emerging markets in particular.

So large companies, what are known as the mega caps which are the largest companies, these provide an indirect play on the growth of emerging markets, on the growth of the emerging markets consumer. In particular, companies in the technology sector or the energy sector have very large exposures to EM so this is another place where an investor who's looking to get that indirect exposure can think about it.

So both from a direct — actually going out and buying the EM themselves — or indirectly from owning large companies in the United States, there are a couple of ways to try to lever off of that emerging market long-term theme.