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Amid a turbulent market environment in 2012, emerging markets stocks have been, well, turbulent.
Some markets (Colombia, Mexico and Thailand to name a few) have performed well. Others have disappointed (Brazil and Russia stand as two laggards.)
But as Money Morning Global Investing Strategist Martin Hutchinson explained last week, economic growth has shifted to these developing economies.
"The IMF's World Economic Outlook projects anemerging marketsforecast with growth at 5.6% in 2013. That's down slightly from 2011 but far ahead of the measly 1.5% growth projected in the "advanced economies,'" wrote Hutchinson in his 2013 emerging markets forecast. "That means investors need to focus heavily their investments inemerging markets, as we have done successfully over the past few years."
Plus, there is no getting around the fact that emerging markets stocks are cheap. The broader emerging markets universe currently trades at a 20% discount to the developed world. And with that valuation discount comes the potential for growth.
But just because valuations are attractive that does not mean all emerging markets stocks are. It pays to be hyper-selective with this asset class.
That's why we've weeded out the weak and come up with some of the most promising emerging markets stocks for 2013.
Emerging Markets Stocks: Updating an Old Theme
One of the most pervasive themes during the growth of emerging markets has been that of the consumer.
While those are a great way to begin your emerging market exposure, there's a way to grab even bigger returns.
Investors can increase their exposure to developing world consumers through local brands servicing the burgeoning domestic demand stories.
Enter the EG Shares Emerging Markets Domestic Demand ETF (NYSE: EMDD).
The ETF is just a few months old and its index trades at a slight premium to the MSCI Emerging Markets Index. That premium may be justified given that Boston Consulting estimated consumers in China and India will spend $64 trillion between now and 2012.
Not to mention, Mexico, home to rising wages and recent labor reforms, has its own strong consumer story. Mexico, China and India represent about 55% of the fund's holdings.
Coca-Cola with a Mexican Twist
Year-to-date, the iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW) has been one of the top-performing ETFs tracking a Latin American market with a gain of nearly 23%.
That sounds good, but investors could have done better with one of EWW's top holdings, Coca Cola Femsa (NYSE ADR: KOF).
The company has beer and soda distribution centers in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil, and Argentina, highlighting the notion that this is one of Latin America's most dominant beverage names.
What is even more interesting about Coca Cola Femsa is the fact that the company is looking to expand its reach beyond its home region.
A recent Philippine acquisition shows the company wants to bolster its footprint in Asia. The company's balance sheet is strong and its profit margins impressive.
However, there is no such thing as the perfect stock, so the risks with Coca-Cola Femsa must be acknowledged. Notably, the shares trade for almost 23 times next year's earnings and nearly 3.6 times book value.
That is a rich valuation compared not only to the broader emerging markets universe, but to the beverage sub-sector as well. What that tells investors is the stock can ill afford an earnings miss, profit warning, or any other disappointment.
Ready for a Rebound?
Baidu.com Inc. (Nasdaq: BIDU) is one of the most well-known Chinese stocks to U.S. investors, if for no other reason than that the company is known as the Google Inc. (Nasdaq: GOOG) of China. That is a good title to have because China is by far the world's largest Internet market and it is the one country where Google is the not dominant provider of Internet search services.
Baidu has taken investors on a roller coaster ride this year. A year-to-date loss of almost 21% does not tell the whole story because the shares were flirting with $155 in April and now reside just above $92.
That precipitous decline has put Baidu's P/E ratios more in line with Google's and lead some analysts to see the former valuation as now attractive. Baidu's trading history is an interesting one and while history is not guaranteed to repeat itself, Baidu's deeply discounted valuation may aid a sequel in appearing.
The last time the stock suffered a decline on par with the one that has been seen recently was in late 2011. After that, the shares soared approximately 45% over the next seven months.
For more emerging markets stocks, check out Martin Hutchinson's 2013 forecast on developing economies. Just click here.
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