%image_alt%While there’s no place like home, sometimes you have to get out of your own backyard — and that includes investing. Impressive growth in emerging economies such as China and India will boost investments that provide exposure to these markets, says the new report from consultancy Watson Wyatt. “We believe that emerging market economies will continue to grow strongly, due to a mix of rising productivity, economic and financial reforms and favorable demographics,” says Craig Mercer, Watson Wyatt’s senior investment consultant, in a prepared statement.

But investors who want to globalize their portfolios should also remember that with the aggressive returns some of these markets can offer come risks, including currency fluctuations and political instability. That said, investors can get in on the international action through index funds or other broad investments that can reduce the chance of any major downside.

So what’s all the excitement about in emerging markets? Watson Wyatt highlights a few possibilities, including the ongoing shift in focus from agriculture to industry and services in many countries, as well as the growth in labor forces.

Some of the other positive developments include deepening capital markets, high rates of investment and the adoption of technology that has improved efficiency. Growing trade among emerging economies is also making these places attractive places for investment. Over the last decade, emerging markets (especially China and India) have shown growth rates well in excess of developed countries.

“It is a widely held view that emerging market productivity levels, particularly in Asia, will eventually converge to developed country levels,” says Watson Wyatt. “Throughout this ‘catch up period’ emerging economies have the opportunity to grow at higher rates than developed markets.”

Emerging markets have found their way into the hearts and minds — and IRAs — of many investors due to the very powerful recent upward trend, says Jonathan Citrin, CEO of the investment firm CitrinGroup. Quick to look for a way to earn back large sums lost in the U.S. market, investors have flocked to broad-based emerging markets and countries such as Brazil, China and Mexico. “Many economists will cite emerging markets as a leading force to bring us out of this global recession,” says Citrin.

Where the Growth Is

It is always good to have exposure to overseas markets, and now even more so, given the headwinds U.S. investors face, says Stuart Kruse, founder of Kruse Asset Management.

Emerging markets is where the growth is and that’s why Kevin Manzo, a financial advisor in the private client group at C.K. Cooper & Company, typically makes emerging markets 5% to 10% of client portfolios. “It’s a great time to diversify your portfolio overseas in order to isolate your risk away from the U.S. market,” he says. “Most dividend paying stocks are international, so it is also a good place for income.”

He adds that going forward, there is going to be increasing opportunity in high dividend yielding stocks as more investors look for income and stable companies.

For most investors, the best way to participate in emerging markets is through broad index funds, such as mutual funds or exchange traded funds, says Jerry Miccolis, principal at Brinton Eaton Wealth Advisors. “If you wish to refine your exposure and include individual countries, we favor China and Brazil, but do it through index funds. His firm, he says, recommends exposure to Brazil and China in combination with a broad emerging market index fund.

Certified financial planner Louis Scatigna advises concentrating on BRIC nations (Brazil, Russia, India and China) as he believes they offer the best long-term growth prospects. In the short-term, though. he’s bearish on China if the world economy resumes its contraction.

Be Open but Be Wary

But just as if you were investing state-side, some of the same tenets apply. Research any potential investment. “If it seems too good to be true, it probably is,” says Michael Robinson, a former SEC spokesperson and chair of the corporate practice at Levick Strategic Communications.

Investors want a company that has good analyst coverage, says Mark Esbeck, president of IMAP, a global organization of mergers and acquisitions advisory firms. And do consider factors like the country’s political stability and economic structure, he adds.

Know too, however, that a large part of the short-term differential in performance with domestic equities is attributable to the value of the dollar. If you don’t want to bet on the direction of the dollar — and you don’t intend to spend a sizable portion of your wealth outside the U.S. — you may not want, or need to invest internationally, says Miccolis. If you think, as many economists do, that the dollar will continue to decline against other world currencies, then you may want to invest internationally in the hopes of gaining extra return.

Miccolis also points out that both emerging markets and developed countries are more correlated with U.S. equities than many investors think. So going international for purely diversification purposes makes less sense than it did decades ago.

Despite all the hoopla, now is not the time to overweight emerging markets in your portfolio. “Never should an investor buy an asset, particularly one as risky as emerging markets, solely for its recent gains,” says Citrin. “Chasing returns is certainly exciting and a surefire way to minimize the returns in your portfolio. If you dare to own emerging markets, ‘buckle up’ and buy for only the long run. The powerful up-trends are matched by deep, strong downward movements.”

But then, with more risk comes more potential for reward. Says Robinson, “If you have no appetite for risk, go for 30-year Treasuries.”

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