Here's a trivia question that might come in handy next time you run into a stock market know-it-all at a cocktail party: What was the best-performing stock market in the world over the past year?
China? Nope. India? Close, but no cigar. The answer: Peru, up 53% in the 12 months through Jan.18, according to MSCI Barra.
Of course, the so-called BRIC countries (Brazil, Russia, India and China) have all been spectacular performers in recent years, too. As a group, these markets have delivered annualized returns in excess of 40% over the past five years.
But they haven't been alone. Egypt, Colombia, Indonesia, the Czech Republic and Turkey have all done at least as well as the BRICs over the same five-year stretch, and in some cases even better.
Some smaller markets have even managed to swim against the tidal wave of global selling in the first few weeks of the year -- no easy feat. The Middle East has been a notable example. Stocks in Kuwait, Oman, Jordan, Qatar and Bahrain are all in positive territory, while MSCI's widely followed EAFE index of developed European and Asian markets has plunged 14% year-to-date.
Now, that doesn't mean you can expect to make a fortune if the global sell-off worsens or the U.S. plunges into a deep recession. Diversification is a powerful tool, but it doesn't work miracles. Still, the lesson here is that it pays to cast a very wide net when looking at international markets. And it is easier than ever to do so these days.
Here are a few ways that small investors can tap into markets that were once off limits to all but a handful of institutions.
Exchange-traded funds. For investors interested in global markets, ETFs have been one of the most important innovations in recent years. The iShares family of ETFs, for example, offers funds that focus on smaller markets such as Malaysia, Chile, Singapore and South Africa.
State Street's SPDR series has a few regional funds that contain exposure to smaller markets in Eastern Europe, the Middle East/Africa and Asia. ETFs are a particularly versatile tool because they offer something for both traders and long-term investors alike. They can be used to place short-term bets on market trends, while their rock-bottom expense ratios make them ideal candidates for buy-and-hold portfolios.
American depositary receipts. These securities trade on U.S. markets and you can buy and sell them directly from your broker as you would any other stock. The ADR universe includes roughly 2,000 companies and spans more than 70 countries around the globe. Bank of New York Mellon and JP Morgan both maintain extensive Web sites with detailed information on ADRs.
Regional mutual funds. If you'd rather have an experienced guide do the stock picking for you, there are a number of specialized mutual funds to choose from. The T. Rowe Price Middle East & Africa Fund (TRAMX) invests in nascent markets such as Qatar, the United Arab Emirates and Egypt. The Baltimore-based fund shop also has funds that specialize in Asia (PRASX), Latin America (PRLAX) and Eastern Europe (TREMX).
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Then there's another technique that I call the "side door" approach. This involves looking at companies that are based in one market, but have extensive operations in other emerging countries. One example is Liberty Global , the international arm of John Malone's media empire. Liberty is based in the U.S., but has stakes in rapidly growing broadband and cable television markets in 17 countries ranging from Slovakia to Peru.
Another example is Turkcell, which is Turkey's biggest mobile phone company. Besides exposure to the Turkish market, it also has operations in Kazakhstan and the Ukraine among other Central Asian countries. The same is true with Russia's Mobile Telesystems OJSC and Vimpel-Communications.
While it's getting easier to invest in these markets, it can still be hard to find good information. Smaller markets aren't always covered by the financial press and if you ask your broker for some research on Kazakhstan you might get a blank stare. Be prepared to do plenty of your own legwork. Forget the CIA World Fact Book -- that's for lightweights. The Economist country briefings are a much better place to start. And they even have one on Kazakhstan.
There has been much debate lately about the concept of "decoupling," or the idea that international markets can deliver strong economic growth and robust equity returns in the face of a recession, or at least a very sharp slowdown in the U.S. In the short run, that may be wishful thinking. But over the long haul, it still pays to expand your horizons. There are just too many opportunities out there to ignore.
