NEW YORK (TheStreet) -- Morgan Stanley recommends investors reduce some risk in emerging markets stocks, but there are a few ways you can still invest in the region without getting in trouble.
The investment bank's rationale for the reduction in exposure includes the fact that the
MSCI Emerging Market Index
reached a new high earlier this week, valuations have expanded and fund inflows have led to an overbought position in emerging markets.
Ron Weiner, president and CEO of RDM Financial Group, would argue that investing in emerging markets is simply investing where the growth is. He argues that emerging markets are still growing anywhere from 6% to 9%, widely outpacing the U.S. and Europe. RDM financial's investment policy is built upon capitalizing on that emerging market growth.
Morgan Stanley says an easing cycle in Asian emerging markets has been priced in. China helped support this theory over the past weekend by instituting another reduction in the reserve requirement ratio for banks in the region to 20.5% from 21% previously. This was a bit of a surprise, especially as the country reported an increase in inflation just a few weeks earlier.
And yesterday, an indicator of China's industrial production was released -- the HSBC flash purchasing managers index increased to 49.7 in February from 48.8 in January, but still remained below 50 for the eighth consecutive month. A PMI reading below 50 means the sector is contracting. Expansion would be determined by a reading above 50.
The global recession has led to moderate growth in emerging markets, but internal policy is expected to be geared toward maintaining growth as best as countries can.
Weiner points out a few ways to invest in emerging markets safely. First he recommends investing in American companies that serve the emerging markets. Examples he gives include
Second, he recommends investing in emerging market dividend funds. While the rules for issuing dividends differs overseas, the dividends can help to mitigate the volatility that is typically associated with investments in emerging market stocks.
The third conservative investing option is buying ETFs comprising companies that serve the emerging markets. His recommendation is the
Market Vectors Agribusiness ETF
. The ETF invests in agricultural businesses and ties in well with the fact that 40% of discretionary spending in emerging markets is spent on food. As the population grows, this ETF should benefit.
Morgan Stanley remains overweight in emerging markets but is taking some money off the table in light of the appreciation that has been seen in the MSCI EM Index. After increasing 28% from the October low, the index leaves room for appreciation of only 13% to the 1,210 price target the broker holds.
That appreciation was partially driven by a significant amount of fund inflows into emerging markets. So far this year, $11.3 billion has been put to work in emerging markets, according to Morgan Stanley. This has led to an overbought position.
The broker recommends playing emerging markets by taking some cash off the table, given the possibility for a correction in the near-term. Morgan Stanley says to pull some money out of India and Turkey as well as materials and diversified financials.
>>To see these stocks in action, visit the
portfolio on Stockpickr.
Written by Lindsey Bell in
>To follow the writer on Twitter, go to