Stocks of companies based in emerging markets have outperformed the S&P 500 index since the end of 2001, rising 218 percent compared to 32 percent for the S&P 500. During that period, the average price-to-book ratio in the emerging markets rose from about 60 percent of the developed markets’ price-to-book ratio to 95 percent. In other words, stocks in emerging markets are valued on virtually the same basis as stocks in developed markets.
This re-evaluation reflects genuine improvements in economic conditions and credit standings. Current accounts have moved from deficits to surpluses, fiscal deficits and debt burdens have declined, and foreign exchange reserves have risen in many emerging markets.
The economic expectations of continued strong earnings growth for the emerging markets remain in place: output is projected to rise by 7.5 percent in the emerging markets in 2007
and by 7.1 percent in 2008: almost three times the growth rate in developed economies.
If you’d like to hold stocks of fast-growing, financially stronger countries in your portfolio, you can access them through mutual funds. Morningstar’s picks for the category are American Funds New World and T. Rowe Price Emerging Markets Stock funds, which have returned 23 percent and 34 percent per year, respectively, over the past three years.