With the Federal Reserve standing pat for at least another five weeks with its potential tapering of its bond-buying quantitative easing program, investors remain a bit anxious. The uncertain impact of the post-QE trading environment has caused U.S. stocks a bit of indigestion.

Since the start of trading last Thursday, the S&P 500 index has been on a steady downward trend as investors have focused on a pair of scenarios: Either the U.S. economy is so weak that the Fed has been spooked into maintaining the QE program — or the Fed is still set to take drain the stimulus punch bowl before the end of the year anyway, putting an end to the liquidity-fueled rally of recent years.#-ad_banner-#

I’m in the latter camp. The economy is not as sickly as it had been, and the Fed realizes that we may be entering a phase of moral hazard as the phase of easy money goes into extra innings. Still, there’s good reason for caution as we head into what is likely to be another lackluster earnings season. It’s just too hard to make a case for an expansion in earnings multiples in an economy like this.

The Global View
Oddly enough, a completely different set of dynamics is taking place elsewhere. Across the globe this past summer, fears of a major change in Fed policy had been spooking emerging markets, especially in countries where foreign reserves and trade balances were looking troublesome. (I discussed the issue in a recent look at emerging-market bonds .)

Yet in a curious twist, these markets have managed to find their footing — both heading into last week’s all-important Fed meetings and also coming out of them. Here’s a broad sample of how select emerging-market ETFs (exchange-traded funds) have fared since the end of August.

Emerging Markets Are Shrugging Off Fed Fears

Considering that many of the same ETFs appeared to be in freefall in mid-August, the turnabout is extremely impressive. (The S&P 500 is up roughly 4% in that time.)

Why the turnaround? We can point to several factors, including:

• China, which had been slowing, is showing signs of a fresh upturn, as a half-dozen economic reports over the past two weeks have signaled expansion. Many emerging markets count on China for growth and stability.

• Valuations. Emerging markets had become remarkably cheap, as I noted recently.

• Calming in the emerging-markets bond market, which has signaled that fears of a deeper run on countries’ currencies is not likely in the cards.

Make no mistake: This is a bad year for emerging-market economies, many of which are going to grow at less than half the rate they had in previous years. Brazil and Mexico, for example, will likely only barely skirt recession, while “Asian Tigers” such as Indonesia, Thailand and Taiwan will likely see their economies grow less than 3%. Indeed forecasted growth rates for 2014 in many countries will be at the lowest levels since 2008 (though Brazil and Russia are expected to rebound slightly in 2014).

Yet investors should never be investing in emerging markets on the basis of short-term economic reports. Instead, investors that are bidding up these markets in September are looking well past 2013 and out into the coming decade, when emerging markets are still expected to be rising at a faster pace than developed markets.

More to the point, many companies in emerging markets are expected to continue delivering robust profit growth, even in the current economic slowdown, with the forward multiples often below the earnings growth rate. To give a sense, first look at the U.S. and Europe in the context of P/E (price-to-earnings) ratios and earnings growth rates.

You’ll note that the U.S. markets have a 2014 PEG ratio (P/E divided by the earnings growth rate) above 1.0, which is typically seen as a sign of overvaluation. In that context, European stocks look slightly more attractive.

In Asia, various markets look relatively more appealing. Most of these markets have fairly low P/E ratios and solid profit growth rates.

The case for Latin America is not as cut and dried at the moment. Only Argentina looks like a solid bargain right now, but that market has become untouchable, due to lousy government policy.

Meanwhile, over in Eastern Europe, international investor interest has been growing, as labor costs remain low and are increasingly a good place for Western European factories to relocate. Turkey, on the surface, appears especially attractively priced, but it pays to see how that country’s current economic challenges play out before jumping in.

Lastly, Middle Eastern markets appear to be reasonably priced, though several of them would be vulnerable to a slump in oil prices that leads to a reduction in local business investment.

Risks to Consider: These markets would be hard-pressed to rally if the U.S. market slumped badly. The notion that these markets are decoupled from America’s is not the case.

Action To Take–> On Oct. 8, the International Monetary Fund (IMF) will release its biannual update of global economic trends and growth rates. It will likely be a bleak report, as the current global economic environment is hardly one to inspire a move toward global investing. Yet it’s crucial to remember that profits in many of these markets are holding up well, these markets still represent the best long-term growth opportunities, and valuations in these markets are often more appealing than in the U.S. 

Don’t buy these markets for a quick snapback trade — they may not continue the solid gains seen thus far in September. Instead, buy them because they represent great multi-year opportunities, and the current valuations imply as good an entry point as any.

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