Investing in Emerging Markets' Energy

NEW YORK (TheStreet) -- When adding foreign exposure or emerging market exposure to a diversified equity portfolio, certain sectors are easier than others. The energy sector is relatively easy because just about every country has a large, publicly traded oil company -- their own Exxon Mobil (XOM) so to speak.

The ETF EG Shares Energy GEMS (OGEM) targets these emerging market stocks in the energy sector. The fund is reasonably broad at the country level although it is heavily weighted to Russia at 30% of the fund. That is followed by China at 18%, India 15%, surprisingly Thailand is next at 8% and Brazil at 7% with South Africa, Poland, Chile, Colombia and Hungary all getting smaller weightings.

There are 30 holdings in total with well known companies like Petrobras (PBR), CNOOC (CEO) and Gazprom (OGZPY) being prominently featured in the fund. The median market cap of the holdings is $23 billion which speaks to the extent to which oil companies, even in developing countries, are very large even by U.S. standards. Petrochina (PTR), for example has a market cap of $250 billion and Gazprom is around $170 billion. EG Shares reports that the trailing PE ratio of the fund is 10.7 times earnings. While not terribly cheap historically, that is a reasonable valuation for the space.

The long-term catalyst for emerging market energy stocks is based on the ascending middle class in these countries leading to a slow but steady increase in demand. This should have the effect of putting upward pressure on oil prices. In turn, that would benefit the companies in the fund.

Since the middle of the last decade per capita oil consumption in China has gone from 1.25 barrels to slightly over two barrels and in India it has gone from 0.75 barrels to a little over one barrel compared to approximately 25 barrels in the U.S. It is not realistic to expect these countries to get anywhere close to U.S. consumption, but a move to three barrels for China and two barrels in India would be very significant given a population of more than a billion people each.

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