The Best Bets for Today's Investment Landscape

Today's investment landscape stinks. With burgeoning government debt, shrinking growth prospects, the housing market in shambles, and the sluggish consumer, we don't have many traditional drivers of the economy in place. This leaves investors with few attractive asset classes in which to park their hard earned capital.

And since most of us don't have the luxury of waiting on the sidelines, you need to save and (heaven forbid) earn a decent enough return on your savings to fund your retirement, to buy a home for your family, to put your kids through school, or to meet any of the myriad financial burdens life places on us. This puts the average investor between a rock and a hard place. Having already touched on "high-quality" U.S. stocks last week, I'll elucidate today on the other major area I think holds some attractive opportunities for long-term investors -- emerging markets.

Back to the basics
Although not sexy, what value investing lacks in flare, it makes up for in substance. Buying shares of companies on the cheap statistically provides returns above the stock market's (excess returns in investing parlance).  And over the past 10 years, no asset class performed for investors like emerging-market equities. Although they're not exactly the secret story line they were 10-15 years ago, most investors at least have a grasp on the broad strokes of the emerging-markets storyline and the drivers spurring their impressive growth. However, most investors probably haven't noticed that these markets seem to have lost a lot of respect since fear (mostly related to the developed world) took root in the market. The relationship between fundamentals and returns for U.S. and international stocks now seems completely out of whack.

Index & Geography

Price-to-Earnings (LTM)

Net Income Margin (%)

Return on Equity (%)

12 Month Return

Real GDP Growth

S&P 500 14.3 8.7% 14.9% 2.1% 1.6%**
Shanghai Stock Exchange 11.9 10.3% 17.6% (17.9%) 9.1%*
Brazil IBOVESPA Index 8.1 17.1% 18.4% (24.9%) 3.1%**
Bombay Stock Exchange Sensex Index 15.0 12.6% 18.6% (15.4%) 8.8%***

Source: S&P Capital IQ.
*For quarter ended Sept. 30.
**For quarter ending June 30.
***For full year 2010.

Moving forward, these key emerging-market exchanges have plenty of appealing characteristics, especially when contrasted against the flagging prospects of the developed world. Broadly speaking (we are talking about entire indices here), they certainly seem cheap, with each of these indices trading near or less than the levels of American markets despite their undeniably rosier growth profiles. Also, with better margins and returns for owners, these stocks seem like ideal places to both escape the malaise threatening the developed world and to find investments that supported by long-term tailwinds.

A piece of the action
So how can you get involved? Several ways, actually. If you want broad market exposure, you can simply buy into one of the many funds that concentrate on specific countries or regions. On the ETF front, you could look into the FTSE China 25 Index (AMEX: FXI  ) , MSCI Brazil Index (AMEX: EWZ  ) , and the Wisdom Tree India Earnings ETF (AMEX: EPI  ) , or the closed-end India Fund (AMEX: IFN  ) . These kinds of ETF plays will give you direct exposure to the country of your choosing while cutting out much of the hassle that buying shares directly can create. You'll also enjoy greater liquidity than you might otherwise find in trying to own individual shares. For the investor who wants the exposure without the legwork, these options seem compelling.

You might also want to try your hand at directly owning shares in some international stocks that trade on American exchanges. These companies all have the same direct exposure to a specific emerging market and pretty compelling characteristics.

Company Name

Home Country

P/ LTM Diluted EPS Before Extra Items

Net Income Margin

Return on Equity

Dividend Yield

China Mobile Limited (NYSE: CHL  ) China 10.3x 24.4% 21.5% 4.2%
Vale S.A. (NYSE: VALE  ) Brazil 4.9x 42% 34.2% 4.3%
Petroleo Brasileiro (NYSE: PBR  ) Brazil 5.6x 18.2% 16.7% 4.2%
Sterlite Industries India (NYSE: SLT  ) India 7.2x 16.6% 14.5% 0.9%
Yum! Brands (NYSE: YUM  ) US.-.based with huge global exposure, particularly in China 20.1x 10.2% 67.4% 2.2%

Source: S&P Capital IQ.

On a fundamental level, these companies all look distinctly cheap, trading at lower multiples than their home-market multiples, with Yum! Brands appearing to be the lone exception. And even more exciting for investors, each of these companies also offers comparable or higher returns on equity and stronger margins than their home markets. Their performance characteristics leave developed markets in the dust. And in keeping with their direct exposure to their home markets, they all stand to benefit as the markets they serve grow and demand for their goods or services increases. As an additional sweetener, each firm also actively pays out to its shareholders, making the return profiles all the more enticing. These figures look pretty compelling even before factoring in their underlying growth stories.

Foolish bottom line
Whether you simply want to avoid the beleaguered developed markets until they look safer or want to juice your portfolio's growth prospects, adding some emerging-market exposure, especially at present, makes perfect sense for most investors. You have to understand the risks, but if done properly, buying into emerging markets, especially on the cheap, can help your nest egg thrive for the long haul.

Emerging markets offer some compelling options for investors.  Likewise, the Motley Fool recently compiled report 13 High-Yielding Stocks To Buy Today detailing potential opportunities in the market. It's totally free to our readers. With current developed markets looking as bleak as they do, you need an edge to your investing research. Access your free copy today to get that leg up you need.

Andrew Tonner holds no financial position in any of the securities mentioned in this article. The Motley Fool owns shares of Yum! Brands and China Mobile. Motley Fool newsletter services have recommended buying shares of Yum! Brands, Sterlite Industries, China Mobile, and Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 20, 2011, at 5:46 PM, Arctific wrote:

    Is the Motley Fool stuck on stocks? While it would be nice to think that things are so low that a statistical time to buy may be comming soon, what if there are other asset classes we should consider other than stocks?

    What are the places we should be when stocks are not that right spot, right now?

  • Report this Comment On October 20, 2011, at 6:27 PM, bfdexp wrote:

    Once Europe settles to a decision we will explode in hopefully a bear market at the end of the 4th quarter... If not guess this will work and hedge on shorts to the Euro...

  • Report this Comment On October 20, 2011, at 6:51 PM, Darwood11 wrote:

    Frankly, I'm not inclined to gamble. The title of the article may be a Freudian slip, or perhaps not. But, I'm not too interested in making stock market "bets."

    On the other hand, the title of the article may simply be an acknowledgement that there is never a sure thing when buying individual stocks. But then, we should know that. Even "sure" thinks such as JNJ or NFLX can disappoint, if only for the short term; which is to say, "the future will tell." But we know that, don't we????

    Perhaps we need a series of articles which range from "want to bet inflation is low" or "want to bet inflation is high" or perhaps "want to bet the world will end in 2012 with the end of the Mayan calendar cycle?

    Me, I assume that the current market will be a reflection of current dynamics, which include high unemployment, a federal government which is more financially inept than the average American, that only private industry and entrepreneurs will create a sustainable future, and that most of the analysts will be looking in the rear view mirror, while most of the "talking heads" will be describing how the toilet bowl whirled as it was being flushed.

  • Report this Comment On October 20, 2011, at 7:50 PM, TempoAllegro wrote:

    Excuse me:

    PBR does not have a dividend yield of 4.2%. Yahoo Finance, the Fool.com's own info on PBR when you look it up on the web site, and my TD Ameritrade account say it is 0.70%.

    I have no idea why you come up with such a high dividend yield! Perhaps if you are buying the stock in Brazil, then you get a higher yield, but the ADR is at 0.70.

    Tell you what, if it was 4.2%, with all of their oil reserves, I would have bought in LONG ago!

  • Report this Comment On October 20, 2011, at 7:59 PM, Sarah900 wrote:

    According to Google Finance PBR ADR div yield is 5.36%.

  • Report this Comment On October 21, 2011, at 4:14 PM, Hawmps wrote:

    In the past 12 months PBR has paid out $1.23/share in dividends. Divided by last quote of $23.94/share as I write this, that is an indicated Y of 5.14%. Looks pretty good, however they are reducing the price of Nat Gas again. I like it, but I think it should come down after this anaouncement as it should surely afect the bottom line. PBR has been on my watch list for a while now. Maybe I'll buy when I collect other dividends later this month and next. I also like TGS for South American energy exposure... reporting profits this year.

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