Emerging Markets Outlook Bright, But Risky

by Alan Lavine and Gail Liberman

One leading overseas money manager favors emerging markets.  But, these markets are risky. So it’s best to spread your risks and invest worldwide. Don’t put all your eggs in one basket.

 “Emerging markets are trading at a 25 percent discount relative to the U.S. market,” says Thomas Melendez, manager of the MFS International Diversification Fund. “Many of the emerging market countries have investment grade ratings by Standard & Poor’s. This is a sign of financial health.” 

Melendez suggests earmarking 5 percent to 8 percent of your holdings toward emerging market stocks. Nevertheless, he says that it’s best to diversify internationally due to high risks in thinly traded markets.

Many structural reforms during the late 1990s and early 2000s in emerging markets have set the stage for growth, he says. “Corporate reforms that have taken place on a company-by-company basis have resulted in an unprecedented strength of their balance sheets.”

Another positive factor: Interest rates and inflation have declined significantly, allowing for sustainable growth in these economies as well as in many companies.

Over the next 30 years, he believes, India’s economy will overtake Germany, the world’s third largest economy. By the middle of this century, the economies should have very technical skilled labor forces.

Some of the largest holdings in the MFS International Diversification fund’s emerging market sector include:

• Samsung Electronics, one of the fund’s largest emerging market holdings. It sells at just 10 times earnings, but future earnings are growing 16 percent annually. The company is profiting from flash memory cards that used in iPods and other electronics.
• Companhia Vale do Rio Doce, a Brazilian iron or mining company. This company has been raising prices at dramatic rates due to strong demand for ore from Asia. Earnings are growing at double-digit rates.
• Tebaris, a Latin American company. This company makes seamless steel pipes for oil exploration. The company’s revenues and profits are rising due to the strong demand for products by the oil exploration industry.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.