Five Reasons to Change Your Outlook on Emerging Markets

NEW YORK (TheStreet) -- It's been a bumpy ride for emerging market investors. In 2013, there were large net inflows, much of it tied to "easy money" being borrowed at little interest, while in the first quarter of 2014 withdrawals started even before the tapering process had begun. That trend quickly reversed and the MSCI Emerging Markets Index (EEM) outperformed the S&P 500 Index (SPY) by 10% from the lows in March and about 5.5% in the past three months due to outperformance in certain countries.

Interestingly, although investors are back, the "favorites" have changed.

India, for example, went from pariah to darling after Mario Draghi was elected president of the European Central Bank.  And Brazil's un-readiness for the Olympics has suddenly put it in an unflattering light.

There are a few lessons here.

1. Not all emerging markets are the same.

The term "emerging markets" was coined by economists at the International Finance Corporation in 1981. Since then, although the term is ubiquitous, definitions vary widely. Some say emerging markets encompasses both maturing economies along with less developed markets. However, you can't compare the state of development in places like Rwanda or Sri Lanka to China and India.

2. It's a mistake to view emerging markets as an "asset class" or a "strategy" in and of themselves.

The countries in question are so different.

You can't call emerging markets an asset class any more than you can call U.S. equities an asset class. Consider the BRICS (Brazil, Russia, India, China and South Africa) which are hardly identical: Brazil and Russia export oil while China and India are importers.

3. Each country, index and company deserves its own due diligence.

Enough said. Do your homework.

4. From a country standpoint, there are bargains to be had.

The cheapest, in order, are China, Brazil, Russia and South Korea. All have huge, growing middle classes with more money than ever and a lot of pent-up demand which will benefit the companies that can supply them with goods and services.

In China, it can be argued that the growth story is not over, but it is evolving. The country is shifting from an economy based on exporting to one based on domestic consumption. While China won't likely sustain an 8% to 9% economic growth rate, investors often fail to put the more likely 7% GDP growth in the proper context -- it would be the envy of any of the world's industrial economies.

5. It's about more than quarterly performance.

Finally, it's not about whether emerging markets will rally or fall from quarter to quarter. It's about the role these stocks play in your portfolio, your risk tolerance, and your outlook on sectors. It's not just about broad country bets.

Political and economic change in any country has always been difficult to predict and it's important to dig deeper. For instance, Brazil's infrastructure has been roundly criticized, but that fact may actually offer opportunities as the government has pledged billions to shore it up.

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At the time of publication, the author held EEM and SPY.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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