What Will be the Most Promising Emerging Market?

Bloomberg Markets magazine recently posted a list of the “most-promising emerging and frontier markets for investors.” Rankings were determined by several investment measures, including GDP growth and ease of doing business. A slideshow from Business Insider does an excellent job showcasing these engines of growth.

It’s no surprise Bloomberg determined China was the most-promising market. The country’s GDP is set to grow at an average of 9.4 percent over the next four years, outpacing the other emerging markets, says Bloomberg. This growth is substantial, even after you factor in inflation, which was 4.5 percent in January. Consumer Price Index (CPI) was slightly higher than December’s number of 4.1 percent due to Chinese New Year, says Andy Rothman in CLSA’s Sinology report, and does not change his view that inflation in China will average 3.5 to 4 percent for the year.

A robust, growing economy isn’t the only reason China was named “most-promising.” Bloomberg says, “China’s low government debt—16 percent of GDP compared with 45.3 percent for No. 2 Thailand—and cheap equity valuations helped secure its top spot among emerging markets.”

Equities in China look “particularly oversold,” according to UBS. Over the past few months, as bearish sentiment weighed on Chinese stocks, we felt that too many investors sold their holdings too quickly over the past several months, driving the price down more than their historical average.

Our fund managers have seen these valuations as a buying opportunity for our China Region Fund (USCOX) and Global Resources Fund (PSPFX) to purchase natural resources stocks with solid revenue growth potential. UBS says China represents a “good entry point” to gain exposure to the long-term growth potential of the country.

Asia and South America aren’t the only two areas topping Bloomberg’s list. Unlike its developed neighbor, emerging Europe has been powered to new levels of capitalism by increasing urbanization, rising incomes and natural resources wealth. Russia and the Czech Republic offer growth at attractive valuations, says UBS. These countries rank 8 and 10, respectively, on Bloomberg Markets’ emerging markets list above, along with Poland, Turkey and Hungary.

Poland’s economy grew 4.3 percent in 2011, the fastest pace since 2008, says Bloomberg, as companies boosted investment and a weakening zloty buoyed exports. We recently discussed the value in Russia’s future given the below-average price-to-earnings ratios in the Russian MICEX Index.

Stocks in these countries may be poised to revert to their long-term means, as our Periodic Table of Emerging Markets shows that these countries were among the poorest performers of the countries we track. In 2011, Russia declined 15 percent, Poland decreased 18 percent, and Turkey and Hungary each lost about 20 percent.

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