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The euro zone is toxic right now. And investors who formerly had their money tied up in the euro or Spanish bonds are scrambling to find a safe refuge. They could do worse than investing in emerging markets.
Unlike most countries in the euro zone, which are back-tracking at break-neck speeds, or even here in the U.S., where post-recession economic growth has slowed, certain emerging markets are growing rapidly. A few of them are taking meaningful steps to stimulate growth.
Brazil, China and India – three-fourths of the so-called “BRIC” economies – are emerging markets worth turning to as Europe flounders and the U.S. economy stagnates. Not only are they growing faster than most of the rest of the world, but their banks are less exposed to some of the carnage the euro debt crisis has wrought.
China and India are the two of the fastest-growing economies in the world right now, with GDP growth rates of 8.1% and 5.3%, respectively. Growth in the U.S. (2%), Japan (2.7%) and even the strongest euro zone country, Germany (1.7%), pale by comparison.
Better yet, emerging markets aren’t saddled with the same kind of debt some of the major countries are. Japan lead the way with a very troubling 211.7% debt-to-GDP ratio. The U.S., Greece, Italy, Ireland and Portugal all carry debt-to-GDP ratios of more than 100%. Even Germany’s is 81.2%.
Meanwhile, China’s debt is just 25% of the country’s GDP, which is the second highest in the world. Brazil’s and India’s debt-to-GDP rates are 66% and 68%, respectively – and those are the fourth- and seventh-largest economies in the world by GDP.
And as The Wall Street Journal noted today, stocks in those emerging markets are cheap at the moment after shares have fallen nearly 20% from their 2012 highs.
The iShares MSCI Emerging Markets Index (NYSE: EEM), which tracks shares in 21 different emerging markets, is basically flat for the year after rising 18% in January and February. But Morgan Stanley (NYSE: MS) is projecting a major rebound for the index, forecasting a rise of 34% by year’s end.
And with good reason. Last week China made the surprise decision to cut its benchmark lending rate for the first time in four years in an effort to stimulate economic growth. This came on the heels of Brazil lowering its benchmark rate to an all-time low of 8.5%, with another cut potentially on the horizon. In April, India cut its benchmark rate – and may do so again when its central bank convenes next week.
Furthermore, emerging-market stocks are also trading at about nine times earnings on average at the moment. Compare that to the average S&P 500 stock, which is trading at 12 times earnings, and it’s clear that emerging-market stocks can be had at a discount right now.