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Which Emerging Markets will Deliver the Best Returns?

|Includes:Banco Bradesco, S.A. (BBD), BRF, CZZ, EEB, EWZ, GML, ITUB, PBR, TUR, VALE
As I’ve said before, there’s a massive emerging market consumer boom underway.  This is driven by the income effect in emerging markets and a dramatic change in consumers’

discretionary income.  This income effect in emerging markets is the single most reliable economic trend in our time.  This is a boom that has decades to run.

Like any investments, emerging market stocks carry risks. There will be some bumps, twists and turns along the way.  But the fundamentals all point upwards.  The key is to do your homework, be selective and invest in well-priced emerging market stocks. Look for stocks that are 1) Easy to understand; 2) Operate in fast growing international markets and 3) Cheap on a relative P/E basis.

Three emerging market stock markets that are well priced right now are Brazil, on a P/E of 13.2 . . . China, on a P/E of 13.1 . . . and Russia, on a P/E of 8.9.  Compare these growth markets to the relatively expensive S&P 500 (on a P/E of 15.1) and you can easily see where the real value is.

My favorite emerging market has to be Brazil, followed by China where I’m waiting for a pull back before buying back in.  Russia is still too risky.  As Brazil moves the 2014 World Cup and the 2016 Olympics, it will see even more foreign investment.  Its currency, the Real, continues to post strong gains against the U.S. dollar.  The economy is firing on all cylinders and grew 8.9% in the first half of 2010, defying expectations of a more significant slowdown and signaling it may beat its previous forecast of 7% growth in 2010.  Looking ahead, Brazil may be getting too cocky for its own good.  But before it does, I’m betting the market has further to go.  It went up almost 6-fold in dollar terms during its last bull run starting in 2003.  Expect some volatility, but over the mid-to-long-term Brazil will outperform.

My 3 favorite Brazil picks:

Market Vectors Brazil Small-Cap ETF (NYSEARCA:BRF)

Itau Unibanco (NYSE:ITUB) – the largest non-government-owned bank in Brazil

Cosan (NYSE:CZZ) – ethanol and biofuels, Shell partner, caution: spec trade, subject to ethanol’s volatility

Other Brazil picks:

- Banco Bradesco (NYSE:BBD) – privately owned bank with Brazil’s 3rd largest banking branch network

- Vale (NYSE:VALE– mining, world’s largest producer of iron ore, strong sales to China

- Petrobras (NYSE:PBR) – oil, Brazil’s largest company, 6th largest energy company in the world, recent dip presents a buying opportunity

- iShares Brazil MSCI ETF (NYSEARCA:EWZ)

- SPDR S&P Emerging Latin America ETF (NYSEARCA:GML) – 63% assets in Brazil

- Claymore/BNY Mellon BRIC ETF (NYSEARCA:EEB) – hybrid of Brazil and China assets

For a more speculative investment, look at this Turkish EFT:

iShares MSCI Turkey Invest Mkt Index (NYSEARCA:TUR)

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Disclosure: "LONG PBR"
Stocks: BBD, VALE, PBR, EWZ, GML, EEB, TUR, CZZ, ITUB, BRF