Buy Cyclical Japan and Secular Growth Emerging     

• The traditional view of investing in emerging markets is that they are highly volatile, illiquid and subject to unforeseen risks such as debt problems, political unrest or natural disasters. Basically, they a like an option on the developed markets, particularly the US, who was often their major export customer.
• But the long-term (10 year) performance of emerging markets as measured by benchmark indices shows clearly superior performance that more than offsets the higher volatility. For example, the MSCI EM index in USD has provided a 7.7% return over the past 10 years, versus a minus 1.2% return for the developed world’s markets, and basically flat performance for the developed world markets ex-the US. In other words, while "buy and hold" may be dead in the developed markets, it is alive and well in the emerging markets. 
• Further, like small cap stocks, emerging markets perform the best in the early stages of recoveries in the developed markets and global trade, and come roaring back from bear market troughs faster than bigger, more mature markets. In 2009, the MSCI EM index produced a massive 75% return versus the “modest” 27% return for the US.
• Growing balance of payments surpluses and more sound financial systems are resulting in substantial growth in savings in the developed markets, and the next big future wave emerging markets will be massive urbanization, substantial investment in infrastructure to support this, and a new generation of middle class consumers for Japanese and regional companies to sell to.
• Thus our thesis for BRICs/Emerging is secular (top line) growth at a reasonable price. Our thesis for Japan is cyclical bottom line recovery supported by a weaker yen.
• However, some Japanese companies are already well on their way to profitably leveraging a shift to Asia/BRICs/Emerging. The Japanese government is only now waking up to this potential, and these are the Japanese stocks we are emphasizing. Look for new policies over the next few months to help Japanese companies capitalize on this emerging market infrastructure and consumer demand.

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