Emerging-market stocks have been on absolute fire in the past year.
While the S&P 500 gained an impressive 12% in 2010, India's Sensex gained 16%, Chile's IPSA gained 28%, and Indonesia's JSX Composite soared by more than 45%. And the trend doesn't seem to be waning anytime soon. Growth is expected to continue over the next two years.
In fact, both Morgan Stanley and Citigroup economists believe that emerging-market economies will grow more than 6% in 2011. Compared to gains of 2% in developed nations, it's no surprise that investors are jumping head-first into emerging markets.
So what's the best way to play emerging markets?
Too hot to handle?
The most obvious answer to this question is to, well, buy stocks in emerging markets. For instance, if you wanted to make a play on rising demand for food in China, you could pick out Yonge International
If you wanted to take advantage of the rush for energy companies to explore and develop more oil fields, you could look toward Brazil, where Petrobras
These two companies are Motley Fool favorites and recommendations from our services; however, there are so many international stocks out there with incredible price tags that it's hard to know whether their potential merits the risk of overpaying. MercadoLibre
Follow the crowd in a different way
According to the Wall Street Journal, a new survey indicated that about 64% of wealthy investors plan to add money to their positions in global stocks this year. Another survey has said that almost 60% of professional advisors are looking to add emerging-market exposure over the coming year.
If you're wondering why it matters what the "rich" are doing with their money, remember that America's millionaires hold more than 80% of our nation's publicly traded stocks, so their decisions literally can move markets. With all that money moving into emerging markets, prices will tend to go up, and price tags will become even richer.
So why not look inward instead of outward? My best three investment ideas for a play on emerging markets are all U.S.-based companies with significant international exposure.
First, look at Yum! Brands
Second, let's look at Wal-Mart
Lastly, I'm suggesting investors get behind PepsiCo
Take three of these and call me in the morning
These might not be the most exciting investments out there. But trust me, you'd be better off investing in these companies and reaping the indirect reward of getting international exposure than investing in some arbitrary company you know nothing about. With lofty valuations, geopolitical risk, and shoddy accounting and financial standards, investing in foreign stocks can be a serious risk.
So think twice when someone tells you that you need international exposure -- and realize that you don't have to count out the U.S. as your No. 1 option.