Getting In on Emerging Markets' Explosive Growth, Without Getting Burned

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The U.S. stock markets may be wrapping up a dismal decade, but many emerging economies across the world delivered blockbuster growth over the same time. And in the years ahead, an increasing number of developing countries should get big boosts from favorable demographics like big working-age populations, historically strong foreign reserves and lots of low-hanging fruit like basic economic development. That's prompting investors in the developed world to grapple with how best to take advantage of the explosive growth abroad.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% The major growth stories over the last decade, of course, came from developing powerhouses with massive populations like Brazil, Russia, India and China, dubbed the BRIC nations by investment bank Goldman Sachs in an investment recommendation trumpeted as the best of the decade. The MSCI index consisting of stocks in those countries has soared 367% over the 2000s. A similar gauge of 23 developed countries gained only 17%.

Those emerging-country returns are enough to tempt many investors to plow money into such markets in the hope of similar performances in the decade ahead. And that's what many are now doing. A record $75.4 billion flowed into emerging-markets mutual funds over the last year, surpassing the prior high of $54 billion in 2007, according to research firm EPFR Global.

Threats to Future Hypergrowth

But while offering the potential for supercharged returns, emerging markets are also spectacularly volatile. Indeed, those who bought in at the top of the global boom in 2007 then witnessed a sharp collapse in short order as investors rushed to safety during the financial crisis.

Nor is it clear that betting on the these economies will offer the same staggering returns in the future. Emerging-market stalwarts like China, often hailed as a rising superpower, may be forced to make dramatic overhauls that could threaten blistering growth in the future.

A rising chorus is criticizing the Asian giant's policy of pegging its currency to the U.S. dollar. China might have to let its currency appreciate -- undermining a cost advantage that has been critical to its export-driven growth model -- or face more tariffs amid increasing hostility from trading partners in the near future.

Some analysts are pointing to an expanding roster of countries that -- while having smaller populations -- exhibit similar traits to the BRIC countries. During the middle of the last decade, Goldman Sachs identified countries ranging from Mexico to South Korea as part of the "Next 11" nations looking at hot economic prospects.

Less Risky Ways to Place Your Bets

While the BRICs outperformed a broader MSCI 23-country emerging-market index by 134% over the last decade, the trend could reverse as a growing number of candidates vie for attention and capital. And investors may have a safer way to take advantage of broad global growth without having to pick from an expanding roster of potential winners.

Developed, stable and natural-resource-rich countries like Canada and Australia -- which saw their stock markets double and triple, respectively, over the last decade -- have already boomed on the back of global growth. As recovery takes hold and further boosts demand for natural resources, countries rich in them may offer better investment opportunities than riskier bets on emerging markets themselves.

Many major American companies with lots of exposure abroad have also done much better than the broader U.S. market over the decade and continue to be well positioned. Shares of Pepsi (PEP) and Exxon Mobil (XOM) were up about 75%, and McDonald's (MCD) was up 50% over a decade where the Dow Jones Industrial Average remained largely stagnant.

Finding other avenues to take advantage of the strong growth that could lie ahead for emerging markets may not offer the same returns as investing in them more directly. But it's likely to save investors some harrowing downward swings as well.
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