China hogs most of the headlines these days, given it represents an extremely compelling growth market for investors. I recently explained why investing in other countries can make more sense, naming India as an example of a country that may have more compelling long-term prospects for investors. But it doesn’t just stop with India. There are a number of countries I think could deliver better returns for investors.

For starters, the fact that these countries receive less attention means they are highly likely to have stocks that are undervalued. Despite what momentum-based investors may tell you, popularity isn’t usually a path to riches. Additionally, many countries are financially sound and more developed than China, which means they could very well see less volatile overall returns going forward.

Here is an overview of three countries that have what are considered stable economies but still have solid growth prospects. Much of this potential exists because of the ability to export goods and services overseas, but domestic demand is a cornerstone of a couple of these countries. Ironically, in many cases this growth potential is enhanced by doing business with China, but it still represents a way to diversify your international growth exposure. I’ll also highlight a number of companies that are worth investigating further.  

1. Chile
Population: 16.7 million
GDP (2009): $242 billion
Market P/E: 23

Chile is not a large country, but it stands out as a very stable economy growing at a consistent and sustainable mid single-digit rate. Chile’s overall stock market price-to-earnings ratio (P/E) is pretty high, but there are a number of better-valued individual names out there.

GDP growth for the coming year is projected to be quite healthy at almost +6%. Exports make up more than a quarter of GDP, and Chile claims to have more free trade agreements than any other country in the world. The country’s primary export is commodities, and it is particularly very dependent on copper.

Given its export bias, investing in Chile is also a play on emerging markets. China is the country’s largest export partner, while Brazil and Mexico are also high on the list. Dominant local firms that have American Depositary Receipts (ADRs) traded in the United States include Embotelladora Andina S.A. (NYSE: AKO-A), which is a Coca Cola bottler that distributes soda and other beverages within Chile and to Brazil and Argentina. Banco Santander Chile (NYSE: SAN), which was created by Spain-based Banco Santander, is another well-respected and growing firm. Given its domestic bias, it is a play on the financial soundness of Chile and it is the largest in the country. Finally, Vina Concha y Toro S.A. (NYSE: VCO) is the country’s largest wine maker, selling its wines all over the world. Each of these firms is trading at a reasonable multiple of earnings given their growth outlooks and current profit levels.     

2. Japan
Population: 127 million
GDP (2009): $4 trillion
Market P/E: 15

The U.S. just suffered a lost decade of flat stock market returns, but this pales in comparison to Japan. Japan’s stock market officially peaked on December 29, 1989 and has still yet to recover. Its economy has also stagnated, especially domestically. As such, it stands out as the veritable value play for investing in the country. Domestic demand remains dismal after many years, but exports remain strong and accounted for $500 billion of the economy last year. This makes Japan one of the largest exporters in the world. 

Despite its difficulties, Japan has many firms that are global leaders and are very profitable. The overall P/E of the stock market is also quite reasonable. National champions include auto titans Toyota Motor (NYSE: TM) and Honda Motors (NYSE: HMC). Both trade as ADRs and are solid plays as global economic growth trends pick up. Technology is another important industry and is led by firms such as Sony (NYSE: SNE) and copier and printer firm Canon (NYSE: CAJ). Like Japan overall, Sony is a turnaround play, while Canon is growing strongly internationally. These firms sell products that should be very familiar to U.S. investors.

3. South Korea
Population: 49 million
GDP (2009): $1.4 trillion
Market P/E: 15

#-ad_banner-#South Korean economic growth has slowed to that of developed countries, but there are many aspects of the country that still boast the returns of emerging markets. Total GDP growth should be solid in the mid single digits going forward, and like Chile and Japan, its economy is heavily dependent on exports that make up more than one quarter of total GDP.

China is Korea’s largest trading partner and is followed by the U.S. and then Japan. Again, this illustrates the stability of its economy but also exposure to faster-growing regions of the world. Of course, geopolitical risk in the Koreas has jumped significantly as of late as North Korea recently shelled a South Korean island near a boundary between the two countries. Things looked to have settled down for the time being, but North Korea could pose a problem given its instability. However, flare-ups have been common for some time and have not led to an escalation of conflict since end of the Korean War.

Also like Japan, the country’s P/E ratio is pretty reasonable overall. And an important component of the investing landscape in Korea is that it is dominated by powerful multinational firms. referred to as “chaebol.” These are basically South Korean business conglomerates. Samsung, Hyundai, and LG are the primary players, and though they don’t offer ADRs on U.S. exchanges, there are ways to invest in them through over-the-counter securities here in the U.S.

A couple of other players that are well regarded in the country include SK Telecom (NYSE: SKM), which is the largest wireless communication provider in South Korea. KT Corp (NYSE: KT) is its primary competitor. Posco (NYSE: PKX) is also the country’s largest steel firm and counts China as its largest export market.  The MSCI South Korea Index Fund  (NYSE: EWY) is also a way to get broad exposure to the country with a number of firms that don’t trade on U.S. exchanges in addition to the ones trading on the NYSE I just mentioned. And the recent tensions with North Korea could represent an attractive entry point for investors.

Action to Take —> Chile, Japan, and South Korea stand out for their export savvy, with Chile and South Korea also standout for their appealing domestic growth. Additionally, Japan and South Korea trade at reasonable multiples.

But as with any investment, a bottom-up approach can prove the most lucrative and each country has more than its fair share of individual stock opportunities. Banco Santander Chile and SK Telecom are interesting plays in domestic demand, while Embotelladora Andina, Honda and Posco have definite appeal for their growth potential outside of their home markets.