Where You'll Find the Real Recovery

The nice move we've seen in stocks since early March has put a smile on the faces of many investors. But although U.S. stocks have put on quite a show in the past month, some international markets are bringing even greater returns.

Just look at how the overall markets of these countries have done recently:

Country

March 9 Close

April 15 Close

Change

U.S. (S&P 500)

676.53

852.06

25.9%

Russia

576.39

805.85

39.8%

India

8,160.40

11,284.73

38.3%

Brazil

36,741.35

45,272.65

23.2%

China

2,118.75

2,536.06

19.7%

Source: Wall Street Journal, Yahoo! Finance.

And while you might think from those numbers that China and Brazil aren't keeping up, you'll still find plenty of stocks in both countries that are putting up some impressive numbers lately:

Stock

March 9 Close

April 15 Close

Change

Petrobras (NYSE: PBR  )

26.37

34.40

30.5%

Vale (NYSE: RIO  )

12.52

16.03

28.0%

Baidu (Nasdaq: BIDU  )

155.08

196.03

26.4%

PetroChina (NYSE: PTR  )

65.85

89.81

36.4%

Suntech Power (NYSE: STP  )

5.26

14.64

178.3%

Source: Yahoo! Finance.

If you had given up on emerging markets as a dead fad that was destroyed in the bear market, look again. International stocks are on their way back, and the BRIC countries (Brazil, Russia, India, and China) could help lead the way.

Where the growth is
As hard as the recession has been for most of the developed world, it has caused a massive slowdown for emerging-markets countries. But in comparative terms, those smaller economies have still managed to sustain at least low levels of growth. According to The Economist, market analysts still expect China to have 6% growth in 2009. India should clock in at 5%, while Russia and Brazil will experience small declines before bouncing back in 2010. 

When you compare those numbers to the expected 2.7% decline in 2009 and small increase in 2010 for the U.S. -- and even worse numbers for Japan and most developed European countries -- emerging markets look really good.

Even though emerging markets are still growing, many of their stocks aren't necessarily priced to reflect their strong growth potential. Petrobras sells for less than 10 times earnings, while Suntech Power sells at just 22 times earnings despite prospects for 22% annual growth over the next five years.

Where the money's going
As you might expect from trend-following investors, money is flowing into investments in emerging markets. According to researcher Trim Tabs, emerging-markets stock mutual funds have attracted $5.5 billion in inflows since the beginning of the year, with the lion's share coming in through exchange-traded funds like Vanguard Emerging Markets Stock (NYSE: VWO  ) and iShares MSCI Brazil (NYSE: EWZ  ) .

That increased attention may actually be bad news for some investors. Often, when performance-chasing investors start buying in, you're better off selling rather than buying. And analysts point out that these markets have huge challenges facing them -- challenges that could get worse if the world economy fails to recover, as many are now counting on.

What you should do
To have the most diversification you can get, though, you need to have at least some of your money in international stocks. Although common rules of thumb have limited investors to small stakes in stocks outside the U.S., the growing interconnectivity among financial markets around the world makes national borders increasingly meaningless for investors. That makes a bigger stake in global stocks -- a stake that reflects the growth in economic activity beyond the U.S. -- much more attractive in today's markets.

Many investors gave up on emerging markets after their big hit in the bear market. But even though they're risky -- and even though not all emerging markets are alike -- the potential growth makes these smaller economies extremely promising for long-term investors. Today's low prices offer a great opportunity to add new money.

For more on international stocks:

If you're intimidated by foreign stocks, you're not alone. Let our Motley Fool Global Gains newsletter be your tour guide to great investments -- you can get a 30-day trial absolutely free.

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Fool contributor Dan Caplinger has invested internationally for years. He doesn't own shares of the companies mentioned. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Baidu and Suntech Power Holdings are Rule Breakers picks. The Fool owns shares of Vanguard Emerging Markets Stock ETF. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy speaks all languages.


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