In this increasingly global economy, the question of whether to invest overseas is a no-brainer. But how much should you invest in emerging countries, those fledgling economies that have churned out supercharged returns (and volatility) over the past few years? Pran Tiku, president of Peak Financial Management in Waltham, Mass., and author of Six Sizzling Markets: How to Profit From Investing in Brazil, Russia, India, China, South Korea, and Mexico, says long-term investors should devote 10 to 15 percent of their stock portfolio to emerging markets (with the bulk of that focused on the "sizzling six"). Tiku recently spoke with U.S. News. Excerpts:
In a sentence, how would you summarize the thrust of your book?
There is a dynamic shift occurring in emerging markets that will spur growth in one shape or form for potentially the next half century.
Most people have heard the case for growth in the "BRIC" countries—Brazil, Russia, India, and China. Why do you consider Mexico and South Korea "sizzling markets"?
Mexico and South Korea don't get enough credit. They are slightly ahead of the BRIC countries in terms of political and economic stability. And look at their dynamics. In terms of population, South Korea is the 10th-largest country in the world and has gained 7.3 percent, on average, since 1998. Going forward, its growth rate is projected to be at least about 5 percent. Compared with the developed world, which is growing at 1 percent to 3 percent, that's remarkable.
Also, as China's neighbor, South Korea has a major edge in terms of infrastructure and technology. It's replacing Japan as a technology partner. For example, Hyundai and Samsung are replacing many of the old-line Japanese companies that used to have an edge in technology. South Korea is also the strongest of the six countries in terms of corporate governance and political stability. Consider the recent resignation of the chairman and vice chairman of Samsung Electronics after alleged tax evasion and breach of trust. That's an example of the country's regulatory environment at work.
Mexico, the 11th-largest country in terms of population, will continue to benefit from NAFTA. But it has also been decreasing its reliance on the U.S. by diversifying exports. Fitch recently reported that credit ratings within the Mexican economy have been diverging from other Latin American rivals' due to strengthened balance sheets, lower government debt, higher commodity prices, and an appreciated currency versus the U.S. dollar. Mexico is producing industry leaders like América Móvil, which continues to build a footprint in Latin America, and cement giant Cemex, which is expanding globally, taking market share, and even buying companies in Europe.
What's making these countries sizzle?
One thing is strong demographics. With the exception of Russia—which has a declining population—all of these countries have a built-in demographic dividend, meaning the younger populations will continue to drive growth. There's also technology. These countries started from a low base but are leapfrogging in technology. They don't need to put out expensive land lines—instead they're leaping into satellites and cable. They're bypassing the traditional technology route for a more advanced route, whether it's fiber optic, digital, or satellite communications.
Education will also propel them forward. All of these countries have come to believe that their continued growth will depend on their ability to educate the masses. In India, they are starting from primary levels in remote parts of the country. The agrarian state of Kerala has achieved a virtual 100 percent literacy rate (adult literacy in India is now about 61 percent and rising fast). This is just an example of how seriously they're taking education. More engineers are graduating from college in India than in the United States. Literacy is also growing in China, where rates are currently about 91 percent. Russia is emphasizing technology as well as education.
How inviting are these markets to foreign investors?
At one time, if you wanted to invest in these countries, you couldn't know who was controlling the companies. Now, many of the larger companies trade on exchanges in the U.S., such as Vimpel, a major cellphone operator in Russia, and Infosys, one of the largest technology companies in India. The corporate governance and accounting standards of many of these companies now match multinationals of developed economies. These are not isolated examples. To be listed in the U.S., these companies must follow the mandates of the Securities and Exchange Commission, which makes it necessary to be transparent. That, in turn, is creating a model for other countries to become equally transparent.