Betting on a Turn

The iShares MSCI Emerging Markets Index (NYSE: EEM) seems to have halted its slide.  The index bottomed out year-to-date on February 3, when it was down 11.2 percent. Since then, it has gained 1.5 percent, but bargains in the emerging markets still abound.

As I discussed in "A Plan, Not a Panic" two weeks ago, emerging markets are in much better economic shape today than they were even just a few years ago, much less during the currency crisis that peaked in 1998. Foreign exchange reserves are generally much more robust, budget deficits are narrower if they exist at all and, so far at least, the full-blown currency war that many were predicting last year isn't likely to breakout.

With rationality finally setting in, this is a terrific time to do a little bargain hunting in the emerging markets.

The most obvious play here is the iShares MSCI Emerging Markets Index itself. Covering China (18.8 percent of assets), South Korea (16 percent), Taiwan (12 percent) and Brazil (10.2 percent) with smaller positions spanning Asia and Europe, the fund is most exposed to any shift in sentiment.

The fund is currently trading at just 10.2 times forward one-year earnings, well below its average of about 18 times over the past two decades. On a price-to-sales basis it is even more attractive valued at just 1.03 times; the last time the index was this cheap on a sales basis was early 2009.

So while there are always dangers in trying to call a bottom to any market move, valuations alone are attractive enough to start pulling bargain hunters back in.

A broadly diversified play on an emerging market turnaround, iShares MSCI Emerging Markets Index is a great buy up to 45, which leaves plenty of room to run back to the average.

For those who can tolerate a bit more risk, you can also drill down and make more country-specific bets.

At this point my favorite would be iShares MSCI Sout! h Korea Index Fund (NYSE: EWY).

South Korea is something of a special case; despite having a highly developed economy, it is still lumped in with emerging markets.

South Korea's per capital income last year totaled more than USD33,000, well ahead of Spain and Italy and closing the gap between France and Japan. The South Korean economy is also the 15th largest in the world, boasts low unemployment and almost nonexistent inflation and ranks 7th in the World Bank's Ease of Doing Business Index.

That said, South Korea still uses capital controls to help protect its won. There is limited currency convertibility outside the country, essentially forcing traders to use Korean institutions. There are also some limits on foreign access to Korean equity markets, essentially making it more difficult to move money out of the country.

Because of those restrictions, MSCI (NYSE: MSCI), the company which is the primary arbiter of what is and isn't an emerging market, still lumps South Korea in with the emerging markets. That creates an advantage for market watchers, though.

Since South Korea is included in almost every emerging market index, any time those countries take a hit South Korea falls with them. But given the fact that it has more developed market characteristics than not, it's also usually one of the first to turn.

So far in February, there are early signs of improvement as iShares MSCI South Korea Index Fund has crossed both its 10-day and 200-day moving averages. Its relative strength index reading has also closed in on its average reading, all of which point to the fund's turn gaining momentum.

IShares MSCI South Korea Index Fund is a riskier bet on a turn, but it should pay off up to 63.