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In these troubled economic times, many investors have turned to stocks that are taking advantage of thriving emerging-market economies to capitalize on the faster growth available there. But if you're thinking of avoiding the riskiest emerging-market investments in favor of what may seem like a safer play, you might want to think twice -- because you could end up making a lot less money.
Spooking the stock market
Lately, the world has become an increasingly scary place to invest. U.S. investors are well-acquainted with the challenges facing our economy at home. Yet similar problems have started to pop up throughout the developed world. Problems in Greece and other European countries have sparked fears of sovereign default, throwing the viability of the euro currency into question. Throughout the world, government debt levels have risen sharply in recent years. The trend shows no signs of slowing, amid a sluggish recovery that seems prone to fall back into recession without continuing support.
For relief, emerging-market stocks have gotten a lot of attention over the past year. During the yearlong rally, stocks from emerging-market countries have been among the top performers, with companies like Baidu (Nasdaq: BIDU ) and Vale (NYSE: VALE ) taking full advantage of favorable economic trends.
Given those gains, however, some have looked instead to multinational companies that aren't based in those countries, but which still do a significant amount of business in emerging markets. That's a reasonable plan, but you might not get exactly what you expect.
Letting domestic stocks deliver
The argument in favor of buying U.S. stocks with emerging-market exposure has a lot going for it. Increasingly, big companies around the world are tapping into emerging markets. Multinationals like Coca-Cola (NYSE: KO ) , Starbucks (Nasdaq: SBUX ) , and Yum! Brands (NYSE: YUM ) all have big expansion plans in China, for instance, and they all expect emerging markets to provide a significant amount of their overall growth in the future. Similarly, Chevron (NYSE: CVX ) is engaged in a joint venture with Petrobras (NYSE: PBR ) to develop oil fields in Brazil, and several other big oil companies have made sizable investments among the smaller economies of the world where they've found natural resources.
It's evident that as the economy grows more global, companies from the U.S. and other developed countries will increasingly look beyond the mature economies of their home countries for bigger growth opportunities. But if you stick with the comfort of stocks whose names you know and are familiar with, you'll miss out on some of the best growth stories of the decades to come.
Going where the growth is
As emerging economies grow and consumers gain more disposable income, people in emerging markets will undoubtedly spend some of that newfound wealth on what they used to see as luxury items from abroad. To some extent, that will benefit the outside companies that offer those goods and services.
But the greater potential for huge growth will come from the fledgling companies that you'll already find within emerging-market countries. Those companies already have some huge competitive advantages within their home regions:
- They're a known quantity among residents.
- They are directly involved in the communities they serve, employing fellow citizens and keeping money closer to home.
- They aren't vulnerable to the whims of currency fluctuations, which can force foreign companies to make an uncomfortable choice between sacrificing profits or raising prices in local currency terms.
If you truly want the best investing opportunities in emerging markets, buying U.S. multinationals isn't enough. Nor should you be satisfied even with the increasingly well-known emerging-market stocks that are listed on domestic stock exchanges.
How to get the real story
It's tough to drill down to get the full scoop on emerging markets. But even though it takes some effort, the rewards of doing further research are worth it.
Whether you do that research yourself or get some much-needed help with the winnowing process, remember this: Investing in multinationals may be an easy way to get emerging-market exposure, but it's not necessarily the best way. The more you know, the better an investor you'll be -- and that's why taking a closer look at emerging markets could be a very profitable move.