Investing in Emerging Markets

Quick, what are the three most populous countries in the world?

If you thought China, India and the U.S., you’re right.

Most people, I think, would be able to tell you that, and probably get the order right too. (China and India are way out in front with 1.3 billion and 1.2 billion people apiece, while the U.S. has 313 million.)

But what’s the fourth most populous country in the world?

Here are a few hints: it’s made up of 17,508 islands (one of them the world’s most populous island), it’s home to at least 150 active volcanoes (one of them the famed Krakatoa) and 86.1% of the population is Muslim.

The world’s fourth-most populous country, with 237 million people, is Indonesia.

In addition, Indonesia has the world’s 17th-largest economy by GDP, making it the largest economy in Southeast Asia. And GDP growth has averaged an impressive 6% for the past five years.

The New BRICs

As enthusiasm for the Chinese investment case has cooled (thanks to political, economic and currency-related worries) investors seeking growth from emerging markets have been looking further off the beaten path for the same kind of returns. Thanks partly to China and India, who paved the way by making emerging-markets investments safer and higher-potential than anyone had thought, a new group of growing economies can now enjoy investors’ attention—and dollars.

They’re a diverse group—still not acronym-ized like the BRICs (which stands for Brazil, Russia, India and China). These new targets of investors’ attentions often include Argentina, Chile, Colombia, Czech Republic, Hungary, Indonesia, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Thailand, Turkey and Vietnam. Obviously, many of these countries are at very different stages of development, and my list is somewhat arbitrary.

One interesting, if totally unscientific, way I’ve estimated these countries’ popularity with investors is simply by looking at our own Investment Digest, which seeks to distill and mirror Wall Street’s focus at any given time.

China has been mentioned in nearly every single issue of the Investment Digest we’ve published over the past three-plus years. India has been in about two-thirds of them. Indonesia and Chile, by contrast, appear in just over a quarter of our issues. Argentina and Thailand have been mentioned in less than 20% of them, Turkey and South Africa in 16%, Vietnam in just over 5% and the Philippines in fewer than that.

Although most of these countries have at least a few companies listed on the NYSE through ADRs, the best way to invest in many of these younger emerging markets is with ETFs. ETFs can buy shares on local stock markets, as well as companies listed on U.S. exchanges. Some ETFs also own shares of companies that do business in their country of focus, even if they’re not based there.

Recent issues of the Investment Digest have included funds that invest in Indonesia, Vietnam, Thailand and Latin America as a whole. Here’s Patrick McKeough’s recommendation of the Market Vectors Vietnam ETF (VNM), from the April issue of Canadian Wealth Advisor:

“Vietnam’s economy is growing quickly, largely due to the country’s rising exports and low wages: its labour and production costs are as little as one-third of similar costs in China. Vietnam also has a large future labour pool: over 50% of its population of 85 million is under 25 years of age. The country’s high inflation rate is slowing, and could fall below 10% by the end of 2012. That should let the central bank cut interest rates, which could spur the economy to grow by more than 6% this year.

“Market Vectors Vietnam ETF (VNM) holds shares of Vietnamese companies or foreign firms that get a significant amount of their revenue from Vietnam. VNM was launched on August 11, 2009. Its expense ratio is 0.76%. [The fund’s] industry breakdown is as follows: Financials, 44.4%; Energy, 25.4%; Industrials, 11.6%; Materials, 7.7%; Consumer Staples, 4.7%; Consumer Discretionary, 4.1%; and Utilities, 2.2%. The Market Vectors Vietnam ETF cuts its risk by investing part of its assets indirectly in Vietnam by purchasing shares of companies that are based outside the country but still do business there. That’s a better approach than adding thinly traded or illiquid shares of smaller Vietnamese companies.

“There are, however, a lot of other risk factors involved in investing in Vietnamese stocks. … One of the biggest risks is politics. Vietnam’s periodic leadership changes can bring positive or negative changes for foreign investors. … Still, the long-term outlook for the Vietnamese economy is positive, and the country is making steady progress on political and economic reforms. Market Vectors Vietnam ETF is a buy for aggressive investors.”

Oh, and in case you were wondering, the least populous (independent and self-governing) country in the world is Vatican City, with 800 residents (including the Pope, who is head of state). It is also the smallest by area, at a mere 110 acres, entirely within the Italian city of Rome.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

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