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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 (Nasdaq: YONG ) , a Chinese company that specializes in animal and plant fertilizer. It has a great competitive advantage and superb relationships with its distributors, and its products are carried in more than 9,000 stores.
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 (NYSE: PBR ) has a near-monopoly on some very lucrative reserves. The company has more than 40 years of experience, along with the knowledge and skill to drill in ultra-deepwater areas. Trading at a P/E of less than 12, this seems like a nice steal and a great way to gain some energy exposure.
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 (Nasdaq: MELI ) -- essentially the eBay of Argentina -- has a P/E of more than 60, while online Chinese search giant Baidu (Nasdaq: BIDU ) has a P/E north of 85. While these companies still have room for growth, at those prices, you have to wonder whether you're just a bit too late to the party.
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 (NYSE: YUM ) , the official company behind Pizza Hut, KFC, and Taco Bell. Yum! has stores in more than 110 countries, along with an enormous growth opportunity in China. Although it already had around 3,600 locations so far in China last year, there's still plenty of room to expand. And the company plans to do so, especially since revenue and operating income for Chinese operations has tripled over the past five years. Even excluding China, Yum! earns about 25% of its total sales abroad. This is a truly global company with great emerging-market exposure, but it has the advantage of being based in the U.S.
Second, let's look at Wal-Mart (NYSE: WMT ) . I know what you're thinking -- stodgy old Wal-Mart? True, its growth in the U.S. has slowed dramatically. But its international sales have risen by 14% annually over the past five years. It operates in China, Nicaragua, and the U.K., to name a few locales, and it shows no signs of slowing down. In addition, it owns a controlling 68% stake in Wal-Mart de Mexico, its Central American operator. The epitome of an international company, Wal-Mart is treated like the old-Arkansas company with few avenues for expansion, so it's currently trading at a P/E below 14. Frankly, that's too cheap for a company with so many options ahead of it. Add to that a 2.2% dividend yield, and this turns out to be a great global play.
Lastly, I'm suggesting investors get behind PepsiCo (NYSE: PEP ) as a third great international option. Pepsi earns just less than half of its revenue abroad, and it does a significant amount of business in Mexico and Latin America. In fact, from 2009 to 2010, net revenues increased in its Latin American, European, and Asia/Middle East/Africa segments. Rather than rest on its laurels, the company's moving aggressively into China to try and steal some market share from Coca-Cola. It recently announced that it plans to spend about $2.5 billion over the next three years in China, focusing on manufacturing facilities, R&D, and brand-building initiatives. The company aims to expand its portfolio of products, which already includes food and beverages that are inspired by traditional Chinese medicine.
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.