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One reason individual investors tend to do poorly investing on their own is because they sell stocks, funds, and asset classes that have done poorly in order to buy stocks, funds, and asset classes that have done well. This is why, while Peter Lynch earned nearly 30% annual returns picking stocks for the Fidelity Magellan fund from 1977 to 1990, the average investor in said fund earned far less -- buying Magellan after it had had a good year (and right before it had a bad one) and selling it after it had a bad year (and right before it had a good one). In fact, although Magellan earned 21.8% from 1981 to 1990, besting the market by more than 5 percentage points, the Magellan investor earned just 13.4%, losing to the market.
If this tradition holds (and why shouldn't it ... the fascinating part about mistakes is how often we repeat them), then we should expect money to flow into stocks this year and particularly into emerging-market stocks just before they drop. That's because the S&P 500 was up 12% in 2010, India's Sensex 16%, Chile's IPSA 28%, and Indonesia's JSX Composite a whopping 46%. Furthermore, with all of the corporate and household cash that remains on the sidelines watching the world's recent stock market rallies, there are a lot of prospective investors ready, willing, and able to buy into what's hot just before it's not.
So is now the time to sell emerging-market stocks and particularly exposure to India, Chile, and Indonesia?
It's a fair question
Although it often pays in investing to be contrary, with regards to emerging markets, 2011 looks like another year to go with the flow. That's because valuations, in many cases, remain reasonable with respect to many of the advantages these markets possess vis-a-vis the U.S. In India, that's a demographic one, with a wave of some 240 million school-age children poised to spark a generation of innovation in the country. As for Chile and Indonesia, those two nations possess rich stockpiles of natural resources such as copper, oil, and rubber that will be in increasing demand as countries such as China and India continue to build out their infrastructure and create hundreds of millions of new middle-class consumers. How can older populations with no stuff in the U.S. and Europe compete?
All told, I expect 2011 to be another good year for emerging markets even as some of them take steps to control inflation and capital movements. And while inevitable volatility will rear its ugly head from time to time, I expect it to be an even better decade for these important emerging markets. With that in mind, here are my current top picks in each country.
One pick for India
Sterlite Industries (NYSE: SLT ) is India's largest producer of industrial metals, such as copper, aluminum, and zinc. While growth in demand for these metals is expected to boost India's GDP growth for years to come due to their use in infrastructure projects, Sterlite stock has suffered due to a recent Indian court order to shut down the company's copper smelter in Tuticorin. Although that smelter contributes a relatively small percentage of Sterlite's operating profits, investors are concerned that this could be the beginning of an era of greater scrutiny for the company. Given India's critical infrastructure needs, I don't expect the government to stand in Sterlite's way for long.
One pick for Chile
Most investors in Chile are buyers of the country's resource plays, but they're overlooking a small company that will benefit as Chile's wealth grows and that does not have direct exposure to volatile commodity prices. That company is BBVA Provida (NYSE: PVD ) , Chile's largest manager of mandatory retirement accounts. See, workers in Chile are required to set aside 10% of their salary for retirement and Provida, thanks to its market-leading position, now manages more than $41 billion for some 1.8 million contributors (giving the company 39.4% and 30% market share in those categories, respectively).
While recent moves by the Chilean government to make the asset management sector more competitive are the most significant long-term risk, the sharp drop in the past week is explained by the company's deletion from Chile's IPSA index and investor concerns in the U.S. that Chile is looking to weaken its currency. Those short-term concerns belie an extremely promising long-term opportunity, and one that I expect to continue to pay outsized dividends so long as cash-poor Spanish bank BBVA (NYSE: BBVA ) remains a controlling shareholder.
One pick for Indonesia
One beneficiary of the growing consumer wealth in Indonesia stands to be mobile phone and Internet provider Telkom Indonesia (NYSE: TLK ) . Although that mobile phone market, like many around the world, is growing more competitive and pressuring Telkom's profitability as well as that of competitors such as Indosat (NYSE: IIT ) , Telkom continues to be the leader in value-added services as well as in broadband -- two niches with the longest runways for growth ahead of them. Overpaying to expand via acquisition in Cambodia is a risk for Telkom shareholders, but the current valuation at less than five times EBITDA seems like a good value given Indonesia's longer-term potential.
The global view
If you're the type who likes to zig when others zag, then chances are you're looking at markets such as the U.K. and Greece right now -- both wild underperformers in 2010. Yet those markets continue to face significant structural headwinds, and my expectation is that the emerging markets mentioned above will outperform them again in 2011.
As always, though, you want to pay close attention to valuation whenever you invest abroad, and Sterlite, Provida, and Telkom Indonesia are all good businesses with good growth opportunities trading at very good prices.