How to Play Emerging Markets With U.S. Stocks

Stateside companies that rake in a considerable share of their income in high-growth areas abroad.

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While the developed world is strapped with heavy debt and an interest-rate policy that has been slow to take hold, emerging markets don't share the same burdens. These budding economies, with their emerging middle class, are increasingly spending on computers, restaurant meals, cars, construction equipment, and other big-ticket items. For investors, increased consumer spending spells opportunity.

Still, because of the volatility and instability often associated with less-mature foreign financial markets as well as potentially undependable and non-standardized financial reporting, investing in stocks through foreign exchanges turns off many U.S. investors.

Another option is investing in U.S. companies that rely on exports—to Asia, Latin America, and elsewhere—to boost their bottom lines.

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"Without growth from international developed markets, we are left with emerging markets to close the gap. Indeed, recent economic and market trends have provided cause for optimism for the emerging markets," says Christopher Brinn, senior portfolio manager with Key Private Bank, in a commentary. "Future emerging-market growth should help to provide a solid base for improved U.S. exports."

Billions of dollars in economic stimulus looks to be finding greater traction in emerging markets such as China, where aggressive cuts on sales taxes on small automobiles boosted sales earlier this year. Recent data have shown an uptick in Chinese inflation, but the central bank has not yet responded with additional interest-rate hikes; policy steps have instead been aimed at reining in bank lending to deflate a threatening real estate bubble.

China and India are the emerging consumer powerhouses, but 43 other Asian countries are pegged for 7.8 percent economic growth in 2011 and 2012, according to the International Monetary Fund, and their demand for goods could well replicate that seen from the emerging giants.

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Investors can still gain exposure to these fast-growing areas of the world by buying shares of U.S.-based and U.S.-traded companies. Machinery, tech, and food companies, in particular, realize a considerable share of their income in higher-growth areas abroad. Although their stocks remain volatile of late, particularly given the wide swings of the U.S. stock market this year, these companies tend to offer more dependable financial accounting and greater liquidity.

There is some cause for caution. Clearly, the overall health of the global economy will impact production and exports. Leading investment banks have recently downgraded their growth projections for the major economies, which could limit emerging-market growth upside to a degree.

In fact, growth in U.S. containerized exports slowed to 6 percent in the second quarter, compared with 12 percent growth in the previous quarter, according to The Journal of Commerce/PIERS research, a trade database and consultancy. The slower growth, including a 2.1 percent year-over-year decline in June, left U.S. export volume up 9 percent in the first half of the year.

High-growth prospects often come with increased volatility risk. But investors should still find ways to bring even a little international flavor to their portfolio, perhaps taking the U.S. angle.

[See Why the Economy May Not Be as Bad as You Think.]

Simon Shnayder, an analyst at investment researcher Value Line, notes some of his preferred picks in a recent commentary:

Pepsico (ticker: PEP) and Coca-Cola (KO) have seen increased market share in China and India where households are accumulating rising discretionary income, a portion of which the population is apparently spending on soft drinks. Unit case volume for Coke products for 2010 over 2009 grew 5 percent in Latin America, 6 percent in the Pacific, and 12 percent in Eurasia and Africa. The companies are investing heavily in production and distribution facilities in these locales. PEP, which offers a 3.4 percent dividend yield, is trading near $60, just off its 52-week low of $59.25. KO, which carries a dividend yield of 3 percent, is trading near $69, in the upper end of its $57.22 to $71.77 52-week range.