Financial News

The stock market's dazzling performance in recent days has convinced a growing number of analysts that the bull market is back, and that U.S. equities are again the place to be. That may be true, but some global investment pros who scout relentlessly for long-term returns worldwide argue that emerging markets, which have been on a tear, remain just as attractive.

Indeed, emerging markets such as Brazil, Mexico, and China have outdistanced the U.S. during both good and bad economic times. Year-to-date through July 24, the Brazilian stock market had pulled ahead with a robust gain of 44%. The benchmark Shanghai index had advanced 82% and Mexico 19%, vs. the Dow Jones industrial average's 3.3% rise and an 8% gain in the Standard & Poor's 500-stock index. The best-performing major index in the U.S. was the Nasdaq composite (NASDAQ: news) , which advanced a hefty 25%.

It might be argued that since emerging markets have performed so well, it may be time to switch away from them and seek potentially huge gains in the U.S. markets. But investors familiar with markets overseas contend there are still opportunities for outsize returns in the emerging economies.

Emerging Markets' Domestic Growth

"We believe the best pool to fish in for sustainable long-term equity returns post the [economic] crisis is in domestic growth in emerging markets," says James D. Awad, managing director at Zephyr Management, a global private equity fund that specializes in highly concentrated investments in developed and developing countries. One of Zephyr's 21 funds focuses on emerging markets, with a portfolio consisting of 25 large-cap and 15 small-cap stocks.

"We concentrate on companies in outstanding businesses with excellent balance sheets, high return on capital, and good corporate governance," says Awad. Even though businesses and companies in emerging countries are difficult to analyze, Zephyr aims to achieve at least a 15% average annual return, "with our portfolio managers applying a very conservative approach to risk," says Awad.

Among the stocks Zephyr is invested in are Singapore-traded Jardine Strategic (J37.SI - news) (JSH.SI), which owns a large stake in real estate giant Hong Kong Land; Randon, a manufacturer of transport systems, such as trailers and hauling components, trading in Brazil with the symbol RAPT; and Frutarom (FRUT.TA), a food flavoring company that trades in Israel. These stocks don't trade on the U.S. markets, and their shares can only be purchased through brokers specializing in emerging markets.

Jardine trades at the U.S. dollar equivalent of 15 a share, Randon sells at about 5, and Frutarom trades at 7.47.

Long-Term Upside

Steve Bates, chief investment officer for the Zephyr Marketable Securities Fund, figures these stocks have tremendous upside potential. "In general we buy only stocks that we think have a long-term [two to three years] upside potential return of at least 50%," says Bates, So far this year, these stocks have contributed to the solid performance of Zephyr's emerging-markets fund, which has gained 34.4%, vs. the S&P's 8%.

Jardine trades at a significant discount to the underlying value of its assets, says Bates. The company has a leading regional presence across Asia in retail, real estate, and agriculture, he says, adding that Jardine's businesses have been holding up well despite the economic downturn.

Randon, one of the largest global manufacturers of trailers and hauling systems, derives a lot of its rapidly growing earnings and revenues from Brazil's agriculture and bioenergy industries, which continue to expand rapidly, says Bates.

Haifa [Israel]-based Frutarom has been taking advantage of the consolidation in the food flavoring business and has been an acquirer, says Bates. Its expertise in citrus flavorings and health-related foods contributes immensely to the company's growth, he notes.

A Focus on Consumer-Related Businesses

Following the double-digit gains of March, April, and May, emerging markets paused to catch their breath in June. Cyclical stocks, particularly those in the energy and mining sectors, sagged on profit-taking. However, stocks dependent on domestic growth -- like Jardine, Randon, and Frutarom -- held up reasonably well, notes Bates. The Russian market suffered a sharp decline, he says, because it is heavily weighted in oil and energy and natural resources.

Zephyr's stock picks are weighted heavily in consumer-related businesses. They have not suffered much during the financial crisis, argues Bates, because they generally don't have leverage or credit issues with their banks.

This means the economic concerns are more cyclical in nature. The emerging countries, most notably China, are trying to "reorient economic activity toward higher domestic consumption," says Bates. "All this adds up to a better long-term picture than we have in the developed countries," he argues.

Uncoupling Theory Doesn't Apply

With Wall Street apparently in a recovery mode and pursuing an upbeat path these days, investors are obviously wading back into the U.S. market. But they shouldn't take their eyes off the alluring opportunities in fast-growing emerging nations.

"The 'uncoupling theory' that some strategists have started to believe [that what happens on Wall Street doesn't affect markets elsewhere] does not appear credible," notes Zephyr's Awad. Indeed, economies in places like China and Brazil appear to be chugging along nicely. So while the U.S. market's ongoing recovery grabs the headlines, savvy investors still have an opportunity to uncover gems in other lands.