IU What's your take on emerging markets in general?

Jensen: We've been underweight those markets for awhile. Emerging markets have just been ravaged during this credit crisis, from September 2008 through today. But it has been impacted to different degrees. In general, though, these markets have been ripped. As a whole, emerging markets were down about 65% in November 2008 from its October 2007 highs. But our view is that it's an important part of the world and we dominate in exposure in our core portfolios. That said, we are totally naked in our core portfolios of some countries such as Chile, China, India, Russia, Taiwan, Turkey and Malaysia.

IU: Why are you bearish on three of the BRICs?

Jensen: The market's breakdown has hit Russia, India and China especially hard. We see all three countries as very risky at this point. The one thing that tends to go up in a down market is correlation. Avoiding risk is the one theme that has driven all asset classes throughout the world.

When we see a return to risk-taking, even at marginal levels, those tight correlations will start to at least show some interruption. At that point, the market will have more appetite for risk. That's when we'll become more interested in the BRICs, specifically, and emerging markets in a more general sense.

IU What emerging markets are you more bullish about?

Jensen: South Africa is the third-highest-ranked country in terms of our risk exposure. We use the iShares MSCI South Africa Index (NYSE: EZA) to provide exposure to that market. We evaluate South Africa, like all other countries, based on several factors.

One is that we take a close look at exchange-rate overvaluation and undervaluation levels. Another important factor we monitor is the level of political risks involved in a particular country and market. And we also look at concentration of stocks in ETFs.

Besides risk, South Africa also scores highly in terms of fundamental factors. Those include: earnings growth (both short and long term); returns on equity and a myriad of different slicing and dicing of earnings-share data. Interestingly enough, South Africa is only average in terms of valuations.

IU Are there any others?

Jensen: Although they're fairly small weightings, we're overweight Brazil and Korea. The common factor driving those two countries in our mind is an undervaluation of their currencies. I understand someone could argue that both economies are weak right now and their currencies are overvalued. But we think that they're actually undervalued, based on a number of factors we review. In general, we look at a basket of goods and how much they'd cost if purchased in the home country. Then we compare that to current market rates those currencies are bringing on world exchanges.

It's important to keep in mind that undervalued currencies in an export-heavy economy can increase GDP growth in that country significantly. That's why we think all three countries—South Africa, Brazil and Korea—have competitive trade advantages that will drive growth as world economies recover.

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