For a number of decades, it made little sense to invest in emerging markets. These markets would do very well when the U.S. stock market rose, and they would get crushed when it tanked. Who needs that kind of agitation? Well, get ready to rewrite that script. Many emerging economies are becoming interdependent on one another, and not on major Western economies. As a result, in the years ahead, we may start to see true “decoupling,” meaning these markets move independently of our markets.

We’re not quite there yet, though. The sharp sell-off in stocks here in the United States and Europe in recent weeks has pressured emerging-market stocks once again. To be sure, mature markets in Europe have fallen farther than emerging markets during the past few quarters — that’s the de-coupling starting to take effect — but emerging markets haven’t been immune, and clear bargains have again emerged in some of the fastest-growing economies in the world. The key is to catch these markets when pessimism is rampant (and book profits when optimism is the rule).

Don’t Blame it on Rio
Brazil serves as a fine example. In October 2010, I cautioned that investors were overlooking a series of headwinds that were emerging, largely due to too-strong growth that creates inflationary bottlenecks. The Brazilian market stayed range-bound for the next few quarters but has now succumbed to domestic and international economic pressures.

Looking at this chart of the iShares Brazil Fund (NYSE: EWZ), you could make a case that the market has support near current levels. Then again, a deepening crisis in Europe could pull emerging markets such as Brazil lower still. But you need to pay attention to the disconnect: Brazil’s economy — along with major trading partners in Latin America — is reaching a critical mass, and the hemisphere-wide long-term growth prospects are quite bright. 

As I’ve written in the past, fast-growing middle classes in places like Brazil create a positive reinforcement loop as domestic consumption rises. That’s what happened in the United States after World War II, and it’s happening now in many leading emerging economies. The chance to buy this long-term winner when its market value has fallen by a third should be self-evident.

Go with the pros
Although it’s helpful to identify the most appealing economies among emerging markets (Turkey, Chile, Indonesia, Colombia and a few others come to mind), it can still be hard to conduct a comparative economic analysis. Is Brazil the best country for investors in Latin America? Why not Chile? Why not Mexico?

It’s hard to know that answer, and it may be easier to rely on the experience of fund managers who have extensive on-the-ground knowledge of a particular region. Take the Mathews Funds’ Richard Gao as an example. He’s been with his firm since 1997 and running the Matthews China Investor Fund (Nasdaq: MCHFX) for roughly a decade. Here’s what Morningstar says:

“Matthews is a topnotch Asia specialist that has posted strong results at a variety of single-country and regional funds. Gao is more experienced than most of his rivals, employs a sound and proven growth strategy, and has delivered excellent relative and absolute returns over time at this fund.”

Consider these stats: If you invested $10,000 in a basket of global stocks a decade ago, then you’d have about $16,000 today, according to Morningstar. If you simply looked to copy the performance of the Chinese stock markets, then you’d have about $28,000. Yet if you invested with Matthews’ Gao, you’d have $37,000.

Results had been even stronger until recently. Fears of slowing economic growth have pushed this fund down from $30 a year ago to a recent $22. That looks like a great entry point to own a fund with a proven long-term track record.

Looking for a more defensive way to invest in emerging markets? Many investors like to focus on their bonds instead of stocks, as yields can be quite juicy and more than compensate for the heightened risk. Here again, the pros have an advantage, and you as well ride along with them. My favorite is the Franklin Templeton Emerging Market Debt Opportunity Fund (Nasdaq: FEMDX), which has generated a 7.6% annual return in the past five years.

Risks to Consider: This isn’t to suggest that these stocks and funds have hit bottom. They could fall further if Europe really spits the bit.

Action to Take –> Any time you see emerging markets sell off, you should think about adding incremental exposure. These markets represent the most dynamic long-term opportunities, even as they still wobble from time to time in the near-term.