Related topics: mutual funds, China, emerging markets, Brazil, investing strategy
Inflation in emerging markets has investors nervous. China, Indonesia, India and other countries are taking actions designed to slow their economies. The combination of slower growth and rising prices will produce a less certain environment for investors, many of whom have reaped the benefits of stellar economic growth from emerging markets over the past decade.
But even as these inflation-fighting measures take root, experts expect emerging economies to grow faster than the economies of developed nations. According to the International Monetary Fund, advanced economies are projected to expand by about 2.5% in 2011, while emerging markets are expected to grow by 6.5% (a modest decline from last year's 7%).
Furthermore, experts say countries with the biggest emerging markets are equipped to deal with the ripple effects of meteoric growth.
"The Chinese and the Indian governments have, in the past, been able to manage their inflation," says Rob Lutts, the president and chief investment officer of Cabot Money Management in Salem, Mass. "They're going to do the same thing here. It's likely an (investment) opportunity, rather than a time to exit and stand clear."
In addition to opportunity, emerging markets carry risk and reasons for investors to be wary.
"I would, in general, recommend a very cautious approach to emerging markets right now," says Morningstar analyst Kevin McDevitt. "Given how strong they've been over the last decade -- and given the amount of money we've seen flowing into these categories -- our concern is that investors might be getting in at unattractive prices."
Experts recommend various strategies for investing in emerging markets. Here are four:
Go broad-based
Emerging markets have sustained a high level of economic growth over the past decade as developed economies have experienced lackluster performance. That has prompted investors to flock to emerging markets, driving up valuations.
That's why McDevitt stresses that investors shouldn't chase performance by jumping into regional or country-specific funds. Instead, he recommends investing in a broadly diversified world stock fund.
In addition to direct exposure to emerging markets, many world stock funds own large multinational corporations such as Coca-Cola (KO, news) and McDonald's (MCD, news), which have substantial operations overseas. Such stock holdings provide a second layer of emerging-market exposure without tacking on the risk and volatility that can accompany investing in developing nations.
"A multinational like Coke has a huge proportion of its business overseas, and a great proportion of that business is in emerging markets, where a lot of (its) growth is coming from," McDevitt says.
With a broad-based international stock fund, McDevitt says investors get access to fast-growing emerging markets without chasing the performance of a specific country, where market volatility and company valuations can fluctuate wildly.
