I recently posed a hard-to-answer question: Where will next year’s top-performing markets be?

To answer that question, you have to make certain assumptions:#-ad_banner-#

• Will commodity prices rebound? If so, then the iShares MSCI All Peru Capped ETF (NYSE: EPU), which has been the worst country fund of 2013, could post a great rebound.

• Will the rebuilding process in the damaged parts of the Philippines lead that economy to resume its recently spectacular rates of economic growth? That was the case in Indonesia, which went on to deliver one of the world’s most impressive growth rates after the devastating tsunami of 2004.

• Will it be Turkey, which is aiming to bring down inflationary pressures so the country’s ideal geographic positioning help it again become the trade conduit between Europe and Asia, the Middle East and Africa?

• Will it be the BRICs (Brazil, Russia, India and China), which collectively account for more than half of the world’s population — and, as a result, possess huge domestic market growth prospects?

Simply using a one-year time horizon for potential gains is the wrong way to focus on the topic. All these countries have great long-term potential, but some are beset by problems that may take more time to play out than investors are willing to allow. 

Instead, it’s smart to ask which emerging markets have the necessary ingredients for both stable economies in the near term and solid growth drivers over the long term. And it helps to identify markets that have moved deeply out of favor in 2013. 

Critical Mass
To start to winnow down the list of potentially appealing emerging markets, you need to start with those economies that have already attained a certain level of heft. By definition, that would entail a close look at the BRICs, but problems arise. Russia is a demographic time bomb, India is buckling under the weight of a dismal infrastructure, Chinese stocks have already fared relatively well in recent periods, and Brazil, one of my favorite long-term growth stories, has yet to feel the full impact of a recent hike in interest rates.

So what other emerging markets have the sufficient size (and critical mass of domestic consumption) that can give investors the confidence that they are not simply the next domino waiting to fall?

Mexico, Indonesia and Turkey have such large economies that they represent a degree of long-term stability that is crucial for some emerging-market investors. And per-capita income of around $10,000 in two of those countries involves sizable middle classes. 

But we can cross Turkey off our list right now for one simple reason: The country’s middle-class consumers are spending way too much, and much of those purchases are imports, leading to an unsustainable $100 billion annual trade deficit (according to the World Trade Organization). The U.S. has always run huge trade deficits without trouble, thanks to the importance of the U.S. dollar, but other countries have no such luxury. 

Yet the greatest measure for investors is per-capita income, as that ties directly to domestic consumption. And Chile, with per-capita GDP of more than $16,000, is a global leader among emerging markets (excluding oil-rich nations in the Middle East, which aren’t really accessible to U.S. investors). 

The Cream Of The Crop
By a wide variety of measures, the Chilean economy has emerged as a force to be reckoned with — and the fact that Chilean stocks have stumbled badly in 2013 just heightens the appeal. Here’s a quick overview:

• The Heritage Foundation cites Chile as the seventh-best country in the world in terms of economic freedom. A lack of corruption and a widespread trust in public institutions are key ingredients for successful businesses.

• With $42 billion in foreign currency reserves, Chile is virtually immune to the currency risks that beset other emerging markets.

• In the past 35 years, the number of Chileans living in poverty has fallen from 50% to 11%. 

• Chile has balanced foreign trade, with $57.6 billion in exports and $56.8 billion in imports in the first nine months of 2013.

• The Chilean middle class has a great deal of economic security, thanks to a well-run pension system.

Yet as noted, Chilean stocks have fared quite poorly in 2013, due in part to slumping copper prices, which still account for a large share of the country’s exports. But the best way for Americans to invest in Chile, the iShares MSCI Chile Capped ETF (NYSE: ECH), actually has relatively limited exposure to the mining sector.

Clearly, investors have been very focused on the impact of copper prices on all of these businesses. Retail spending, for example, takes a hit when copper miners are working less. Yet Chile is hardly struggling. The economy is expected to grow 4% to 4.5% in 2013, though that’s down from 5.6% in 2012.

And make no mistake, Chile is not positioned to have one of the fastest-growing economies in the years ahead. That honor will go to countries with much smaller rates of per-capita GDP. But Chile’s rising middle class, growing role in Latin American trade, and abundant natural resources should help keep growth moving ahead of developed economies’ growth rates. 

Which brings us back to the Chilean stock market, which has stumbled badly. The iShares ETF has severely underperformed the S&P 500 Index this year, to an extent not seen in a very long time.

Even if you assume that U.S. and Chilean economies possess equivalent growth prospects, you’d have to conclude that the recent market performance implies that U.S. stocks are now sharply overvalued, or Chilean stocks are sharply undervalued.

Or perhaps a combination of both.

Risks to Consider: Chile has just elected a new government that’s aiming to expand free education with funds from higher corporate taxes. That could serve to brake the economy, though it could create an even larger middle class in coming years. 

Action to Take –> Although a number of emerging markets have stumbled badly in 2013, few of the laggards have built as strong and sustainable platform as Chile has. Though it’s hard to pinpoint how this market (and ETF) will fare in 2014, a long-term investment in Chile has never held more merit.

P.S. Have you heard about our Top 10 Stocks for 2014? Stock #3 gives you a stake in dozens of infrastructure monopolies across the entire world. It owns electric grids in Chile…. it holds railroads and coal facilities in Australia… toll roads in South America… and timberland in the United States and Canada. To learn how to get the name and ticker symbol of this stock — along with the rest of our Top 10 Stocks for 2014 — click here to read this special report.