Like equity markets everywhere, foreign exchanges in Latin America, Eastern Europe and Asia have taken quite a tumble over the last year and a half.

Yet this is not like the Mexican Peso Crisis of 1994 or the 1997 Asian Financial Crisis. Those downturns were brought on by poor government policies and financial mismanagement in these regions.

But these developing economies have since been rebuilt on sounder financial footing. Moreover, you’ll notice that the recent worldwide sell off in equity markets was brought on by problems with U.S. real estate, mortgage securities and banks, not in developing markets themselves.

Still, in their rush to avoid risk many U.S. investors are leaving – or avoiding – these emerging markets at precisely the wrong time.

Yet the risk premium is much lower than it used to be. Most developing countries have already evolved from communism to democracy and from state-controlled economies to free-market ones. There are plenty of other good reasons to diversify into these markets, too.

Let’s start with the big picture.

Emerging Markets – Covering 85% of the World’s Population

While emerging nations cover 77% of the world’s land area and represent 85% of the world’s population, they currently produce only 23% of the world’s gross domestic product.

That’s changing…

There are now 3.8 billion “middle class” people in the world today. Thanks to emerging markets, that number will double over the next 20 years.

As The Wall Street Journal wrote last month:

“In the next 24 hours, approximately 180,000 people in developing countries will be moving from the countryside to cities such as Shanghai, Sao Paulo, Johannesburg. The same will happen tomorrow and every day thereafter for the next 30 years, the equivalent of creating one new New York City every two months, according to the United Nations. These men and women will need everything, electricity, water, food, health care, shelter, schools, computers and, of course, jobs. Many have the potential to improve not just their local environment but the world.”

Some companies in the West – and, of course, many of those in developing markets themselves – are set to enjoy an extraordinary period of prosperity.

These new consumers will need dishwashers, microwaves, laptops, cell phones, automobiles, eyeglasses, credit cards, pharmaceuticals, insurance and every other product and service we already take for granted in the West.

Why bet on companies that may (or may not) create a new cancer drug or hit a new gold strike or develop a faster computer when you can bet on dead certainties: companies that are busy meeting the enormous untapped needs of billions of new middle class consumers.

January, for example, was the first month ever in which car sales in China topped U.S. car sales. And it may be that way for the rest of your life – and your children’s lives.

Emerging Markets: Promising & Cheap

Right now the world’s emerging markets are both exceptionally promising and extraordinarily cheap.

Moreover, a lot of these developing market stocks are denominated in currencies that are tied to the dollar. (So a stronger greenback like we’ve seen lately won’t hurt them – or the dollar value of your securities.)

No wonder emerging markets manager Mark Mobius says he feels “like a kid in a candy shop.”

The potential in these markets is greater than it has ever been before. Anyone who can count to 180,000 (a day) should understand exactly why.

Source: Emerging Markets: 180,000 New Investment Opportunities… A Day

Back in 2001, the Goldman Sachs Group Inc. (GS) – eager to push its clients toward emerging markets investment – created the acronym “BRIC” to stand for Brazil, Russia, India and China, the four emerging markets the investment bank’s strategists believed would become a dominant part of the world economy in the years ahead.

Such was the case until the global financial crisis happened. Now, Russia is falling out of investor sunlight and into the pits of recession.

Russia’s Economic Development Minister Elvira Nabiullina projects a 2.2% gross domestic product (GDP) decline for 2009, according to EurasiaNet. But the current global financial crisis is making previous estimates look foolish and impossibly rosy (U.S. GDP was originally estimated to fall 3.2% for the fourth quarter. In reality, GDP plunged 6.2%).

The culprits: A falling ruble, plummeting oil prices, war with Georgia and a gas-export dispute with the Ukraine.

Russia’s economy is heavily reliant on its oil reserves, making the effects of falling oil prices easy to measure. But the silent killer of the Russian economy has yet to be full measured – the money spent in a thus-far vain attempt to prop up its falling ruble.

The ruble recently fell to a level not seen since 1998, a scary statistic because that was the year Russia experienced a nationwide banking crisis – and it was also a period during which world markets were being roiled by the Asian Financial Crisis, also known as the “Asian contagion.”

In an effort to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold more than a quarter of the country’s gold and foreign-currency reserves. Russia’s reserves, the world’s third-largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

That has some economists calling for a “free-float” – or a big devaluation – to avoid depleting all of the reserves.

The tactic, and the accompanying effect on investors, is nearly identical to that of 1998, when the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt. Investors are fleeing Russia because the government is tapping its reserves to defend the ruble, further eroding investor confidence and undermining the currency.

Brazil, India and China are currently faring far better than Russia currently, but are still dealing with their own unique struggles. That has led analysts to question the viability of the BRIC acronym.

Milton Ezrati, a senior economist and market strategist at Lord Abbett & Co. LLC, recently published a report titled, “Broken BRIC,” in which he questions the notion of lumping those economies together – especially in view of their wealth of differences.

“We, at Lord Abbett, were always skeptical of BRIC,” Ezrati said in an interview with MarketWatch.com, noting that investors should diversify beyond emerging markets. “The whole concept behind the BRIC, that these four countries were leaders, is no longer the case today.”

Ezrati no doubt has his share of dissenters, who can quickly point out that while the stock markets of China, India and Brazil are taking their lumps, they are the only major economies in the world with positive GDP growth.

Effect on Local Elections

Looking at Russia’s recent local election results, the country’s decline into the financial red is having little effect on the popularity of United Russia, the party of former President and current Prime Minister Vladimir Putin.

Elections were held yesterday and preliminary results show United Russia racking up commanding leads in local elections around the country, The Associated Press reported. Of course, allegations of election violations abound.

But the bottom line is that those in power are keeping it. Doing so engraves their names next to the economy’s decline; but it also gives them a chance to take credit for recovery if their policies work.

Source: Russia’s Economic Demise Could Turn “BRIC” to “BIC”

That decision may not seem very significant, but consider it this way: If you were Indonesia, which countries would you rather have as your buddies? A bunch of sleazy, corrupt, idle “lottery winners” such as Nigeria, Venezuela and Angola? Or would you prefer a set of hard-working and diligent neighbors such as Singapore, Malaysia and Thailand? Not to mention two of the largest growth economies in the world: India and China?

Believe me, when Indonesia left OPEC it wasn’t to save the paltry $3 million annual dues. Like Groucho Marx, Indonesia decided it didn’t want to be a member of a club that had such low standards for membership. Instead, it would rather join the good guys.

For emerging market investors, that choice is a significant one.

To be fair, Indonesia’s decision wasn’t just based on a snobbish desire to mingle with a classier set of countries. For one thing, while Indonesia still produces and even exports quite a lot of oil, it’s a big country and is no longer self-sufficient from a petroleum standpoint: While its needs are about 1.1 million barrels per day, its production is now only 860,000.

What’s more, Indonesia doesn’t share OPEC’s ambition, which currently appears to be to squeeze the rest of the world until oil costs $1 million a drop. Indonesia subsidizes oil for its domestic consumers (237 million of them, most of who are pretty poor) and so the last thing it wanted was yet higher oil prices – the subsidies were killing its budget.

President Susilo Bambang Yudhoyono took a huge amount of heat when he increased domestic oil prices by 125% in 2005; there were more riots after he found it necessary to raise them another 30%. However, if he hadn’t done so, oil subsidies alone would have been more than 20% of government spending – and that’s before taking into account food subsidies for the poor, also necessary in a year when rice prices have trebled.

The bottom line is that Indonesia wants lower – not higher – oil prices. More so, in the last decade, it has abandoned the sillier features of an OPEC-member country’s economic-management playbook. While the oil company Perusahaan Pertambangan Minyak Dan Gas Bumi Negara – commonly referred to as Pertamina – is still state-owned, it is allowed to do joint ventures with foreign companies. And, unlike Russia or most OPEC countries, Indonesia’s government has the sense not to steal the proceeds of those joint ventures that prove themselves successful. As a result, more than half of Indonesia’s oil-import deficit will disappear when the Cepu Block offshore oil fields, jointly developed by Pertamina and Exxon Mobil Corp. (XOM), opens up to full production in 2010.

Since Indonesia doesn’t agree with OPEC’s prime objective, and doesn’t approve of OPEC’s typical state-owned kleptocracy as a way of conducting business, it’s not surprising it decided to leave.

That’s not to say that Indonesia has reached free-market perfection. For one thing, it remains astonishingly corrupt – ranked 143rd on Transparency International’s 2007 Corruption Perceptions Index. That places the country far below China and India and close to the level that makes Nigeria and Myanmar such charming places in which to do business. The corruption dates back to the 32-year rule (1966 to 1998) of Indonesian strongman Suharto, who modernized the economy but used his position to grab billions of dollars for himself and his family and was forced out of office in an economic collapse. He died early this year.

Nevertheless, in the last decade, instead of wasting energies on rooting out every vestige of Suhartoism, Indonesia has moved a long way towards being a functioning democracy. Under Yudhoyono, the economy has grown at around 5% per capita, while privatizations have taken place – the steel company Krakatau is due to be privatized later this year, for example. Public spending has been kept under control and, most importantly, Indonesia has used these years of easy money and high commodity prices to pay down debt. Its international debt is now only 35% of its gross domestic product (GDP), a level it should easily be able to live with without major crises.

In summary, Indonesia has moved from a commodity exporter to a true emerging market, and deserves the attention of investors accordingly.

There are only two Indonesian companies with full American Depositary Receipt (ADR) listings, both of them in the telecom sector. Thus, the easiest way for a U.S. individual investor to invest in Indonesia is through the closed-end Indonesia Fund (IF) The fund is run by Credit Suisse Group AG (ADR: CS), is rather small at only $93 million in assets, but has the advantage of selling at a 9% discount to net asset value (NAV), with an expense ratio of 1.55%. It has returned 38% per annum over the last five years, as Indonesia has demonstrated its recovery from the 1998 “Asian contagion” financial crisis, but there would appear to be more to go for.

Indonesia’s satellite telephone company PT Indosat Tbk (ADR: IIT) operates cell-phone and long-distance services, and is currently trading at a Price/Earnings ratio of 15 on trailing earnings. It has a dividend yield of 4%.

Indonesia’s fixed-line telephone company, PT Telekomunikasi Indonesia (ADR: TLK), is trading at a trailing P/E of 14, and features a dividend yield of 3.6%. It offers fixed-line and cell-phone services, and is the country’s traditional telephone provider, founded in 1884.

With the two ratings so close, I would tend to go for the satellite service PT Indosat Tbk, since Indonesia is a large and enormously complex archipelago, with shaky infrastructure.

Source: Even Groucho Marx Would be Happy With Indonesia’s Profit Opportunities