Emerging markets may look friendly, but watch out for teeth
— -- Let's say your neighbor has a dog named Sam. Nice dog. He'll wag his tail for you. Do tricks. Heck, he'll even fetch your paper.
Unfortunately, every few months, some distant memory of Sam's unhappy puppyhood returns, and he uses your tibia for a chew toy.
A sensible approach would be to avoid Sam altogether, or to approach him only when wearing stainless steel socks. Sam's adorableness, after all, doesn't make up for the pain of his bite.
Think of emerging-markets funds as a kind of financial dog with anger issues. Both are wonderful when they are good. But you should approach them very, very carefully. It's hard to make up for the pain they cause when they're bad.
Emerging markets are a bit of a misnomer. When most people think of emerging markets, they think of stock markets in new, impoverished nations where the main export is despair.
In fact, emerging markets are simply countries that aren't among the major developed countries, such as the United States, Japan and the Euro zone. MSCI Barra, which tracks returns from global stock markets, considers China, South Korea and Russia as emerging markets.
Right now, emerging markets look awfully tempting. MSCI Barra's Europe, Australasia and Far East index has gained 5.1% this year, in U.S. dollars. Its emerging-markets index has soared 33.3%.
Emerging markets have beaten developed markets for the past decade, too. EAFE has lost about 1% a year for the past 10 years; the emerging-markets index has gained 6.9% a year.
And emerging markets have great growth potential. India, for example, has about 392 million wireless phone subscribers, or about one cellphone subscription for every three people, according to the Telecom Regulatory Authority of India. Plenty of room to grow there: India added 15.6 million wireless phone subscribers in March alone.
In contrast, about 86% of the U.S. population own cellphones, says the Central Intelligence Agency. (And they know. Oh, yes, they do.) The U.S. market has room for replacement phones, but most emerging markets are far more ripe for growth among new users.
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