Many investors have rejected emerging markets, and I can't say I blame them. As a group, emerging markets really went sour in 2011, dropping nearly 19% and trailing the S&P 500's 2% gain by about 21%. Still, I urge those who feel these markets are nothing but bad news to reconsider. After returning 76% in 2009 and 19% in 2010, they were due for a pullback. But now, emerging markets have resumed their upward march, rising more than 14% so far this year, compared with about a 6% gain for the S&P 500.
Now seems an especially good time for investors to jump into emerging markets, because their future once again looks bright. Assuming Europe's debt crisis continues to remain largely at bay, and I believe it will, some economists see emerging markets rising anywhere from 15% to 30% in 2012. Falling interest rates and cheap stock valuations resulting from the 2011 sell-off are among the catalysts that could help propel emerging markets sharply higher, these economists say.
Not all emerging markets have the same growth potential, though. So you might consider putting a portion of the funds you've earmarked for emerging markets into mutual funds or exchange-traded funds (ETFs) devoted specifically to the most promising developing countries.
My favorite emerging market for 2012 and beyond
South Africa may be one of the best places for emerging markets investors. I think its stock market is among those most likely to rise 30% in the coming 12 months. Here's why...
Economically, South Africa is a force to be reckoned with. After expanding at an estimated 3.5% rate in 2011, gross domestic product (GDP) -- now approaching $400 billion annually -- is expected to climb 4.3% in 2012, and growth should average right around 4.2% for the next 10 years, economists predict. In terms of GDP growth, this puts South Africa in same league as some of the more established emerging markets -- like Taiwan, were GPD is projected to rise 4.7% per year, and Brazil, whose economy is expected to grow 4.5% annually. South Africa is a powerhouse compared with some of the more troubled European economies like Italy, which is only projected to grow GDP by only 0.9% a year through 2020.
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Although South Africa has long been known for the mining of diamonds, gold and other precious stones, minerals and metals, mining has actually become a progressively smaller portion of the South African economy. And for investors worried about these sometimes-volatile markets, that's a good thing. Mining now accounts for only around 3% of GDP, compared with about 14% during the peak years of the 1980s. Even so, South Africa's mining industry is the world's fifth-largest, behind China, the United States, Australia and Brazil.