T. Rowe Price Emerging Markets Stock has posted stellar returns by favoring developing nations with strong finances and domestic consumption. By Andrew Tanzer, Senior Associate Editor April 6, 2010 Emerging markets has always been a broad-brush term for what is really a diverse group of developing nations. Gonzalo Pangaro, manager of T. Rowe Price Emerging Markets Stock (symbol PRMSX), a member of the Kiplinger 25, observes an increasing polarization in the outlook for low- and middle-income countries. Broadly speaking, Pangaro, born in Argentina and now based in London, divides developing nations into two camps. Those with strong finances that have reformed their economies -- such as Brazil -- will continue to flourish. The ones with capital shortages and large fiscal and current account deficits -- such as much of Eastern Europe -- will lag. This insight informs the way Pangaro invests the fund’s assets. He’s shunning Hungary and the Czech Republic while devoting large allocations to Brazil and China. A second theme is a focus on domestic consumption, especially in nations with large populations. Pangaro has reduced weighting in export-oriented economies, such as South Korea and Taiwan, which may suffer from appreciating currencies and sluggish growth in the U.S., Japan and the European Union. For instance, one of the fund’s top positions is América Móvil, a large Mexican company that is the number-one or -two cell-phone operator in most Latin American countries. Pangaro considers Móvil’s controlling shareholder, Mexican multibillionaire Carlos Slim Helú, a shareholder-friendly proprietor. Growth prospects remain attractive for the wireless business over the next few years, in part because many Latin American people have never even had land-line phone service and want to skip straight to wireless. Advertisement Food retailing is another favorite theme for Pangaro. He notes that modern supermarkets and distribution centers are new to many emerging markets and will take business away from informal farmers’ marketplaces and mom and pop shops. Walmart de México is among the fund’s ten largest holdings. Pangaro is also warm to Russian food retailers. But the fund’s biggest sector allocation of all, at 26%, is in financials. “Banking systems in the emerging markets are much more solid than in the developed world,” says Pangaro. Loan-to-deposit ratios tend to be modest, banks are well capitalized, and there’s room for growth in mortgages and other consumer loans. The fund’s largest bank position is Itaú Unibanco Holding, Brazil’s largest privately-owned bank. Pangaro thinks the sector is a fine place to be for long-term investors, but he’s the first to concede that emerging markets, whose stock markets depend on investors bringing money from rich countries and leaving it there, will remain jumpy. Emerging Markets Stock returned 90.6% over the past year through April 1 and 14.4% annualized over the past five years, but the ride will always bumpy (indeed, the fund lost 60.5% in 2008). The fund is twice as volatile as the U.S. stock market. Pangaro advises a disciplined, dollar-cost-averaging approach to investing and, in particular, suggests that you buy after market selloffs.