Five ways to tap into emerging markets

Emerging markets are where the world's growth is - and where a lot of money will be made, says Karim Rahemtulla. Here, he picks five investments to form the basis of an emerging markets portfolio.

As the size and depth of the economic recession became apparent in 2008 and continued into 2009, I've seen one, four-letter acronym bandied around with increasing regularity: BRIC.

With investors scurrying to seek better investment opportunities in other parts of the world, the so-called emerging market BRIC nations - Brazil, Russia, India and China - have barreled to the front of the line.

Why the allure? Well, for investors of all stripes, America's financial implosion has proved the importance of diversifying, but from the realisation that a globalised economy truly offers some great opportunities elsewhere, too - and especially away from an economy and currency that have sunk.

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However, the recent Dubai debt issue has served as a stark reminder that emerging markets are vulnerable to shocks, just like the United States.

So what's the deal with emerging markets? Where are they headed in 2010 and beyond?

Buyer beware

I began my career as an emerging markets analyst long before they were "en vogue." I spent time in Turkey, Indonesia, China, Chile and Malaysia and even went to places like Timor in search of investment opportunities.

There's no doubt in my mind that emerging market investments deserve to be in your portfolio. Now more so than ever, in fact. Simply put, it's where the growth is and it's where a lot of money will be made.

However, there are risks. I stayed away from many more companies because emerging markets, while compelling, can sometimes offer false hopes and empty promises.

In addition, the BRIC countries, with the exception of Brazil, are prone to foreign over-investment. For example, over the past five years, India has received more foreign investment funds than in the previous ten years combined. When you've got huge amounts of cash plowing into a small, illiquid market, you can understand how you'd get meteoric rises and even more spectacular crashes.

But when you find the right companies in the right emerging markets, the profit potential can be lucrative.

For example, when I visited India two years ago and took a tour of some tech sector companies, it was apparent that the potential was huge. I bought Infosys (Nasdaq: INFY) when it was trading in the $30s and now am getting ready to jettison the position for a healthy profit. And it was the first-hand inspection and research that gave me the information I needed.

So where should you look in 2010 - and what should you buy?

Your BRIC investment plan

The key to emerging markets is to buy when "blood is running in the streets" - something that happens often.

However, the BRIC countries have experienced strong returns - upwards of 60% from the lows in some cases. So the best thing to do now is to set a BRIC investment plan. For example...

Invest according to the ones that have the most potential - and do so incrementally, not all at once.

Your highest allocation should be split between China and Brazil.

Your lowest allocation should be Russia.

India should be your third-largest allocation.

Countries such as Vietnam, Malaysia, Indonesia and the Philippines should also be a part of your emerging market portfolio.

Specifically, consider such investments as:

Brazil: The WisdomTree Dreyfus Brazilian Real (NYSE: BZF)

Russia: The Templeton Russia & Eastern European Fund (NYSE: TRF)

India: The India Fund (NYSE: IFN)

China: The Templeton Dragon Fund (NYSE: TDF)

And for exposure to the BRICs and the non-BRIC regions, consider the Templeton Emerging Markets Fund (NYSE: EMF).

So when should you buy? Here's the key...

The best time to buy emerging markets

For emerging markets funds such as TDF, IFN, TRF and EMF, you must look to buy when they're trading at a discounts to the net asset value.

Preferably, a 15% to 20% discount would be the ideal level to really allocate some funds, while on the other side of the equation, you should avoid paying a premium of more than 10%.

If the investment is trading anywhere in the middle of that range, you should allocate a few percent of your total allocation for emerging markets each month, thereby buying at levels that are higher and lower than current prices.

And because they're emerging markets, they can be raw and volatile in nature. While the Internet, better regulations and more responsible local governments have helped cut down on this, there's still risk. Not so much that GDP growth in the respective countries will be lower, but a general lack of transparency instead, which can lead to misinformation, fraud, and big rallies and collapses.

So be prepared for big moves in either direction and have cash handy to buy in bulk. It's usually during times of panic that emerging markets have an unblemished track record for stellar returns.

This article was written by Karim Rahemtulla for the free daily investment email Investment U