Ed Kuczma is an investment analyst focused on emerging markets for Van Eck Global. He took time Wednesday to discuss his latest views on emerging markets with IndexUniverse.com’s Cinthia Murphy. Van Eck is a large provider of both actively managed mutual funds and index-focused exchange-traded funds.

IndexUniverse.com (IU.com): Everyone seems to be talking about emerging markets these days. Why are they so hot?

Ed Kuczma, Van Eck (Kuczma): Emerging markets have been really big year-to-date. The growth in GDP in the region is much higher than in developed countries, and it’s been that way throughout the global recession. The trend moving forward is for that growth to continue.

IU.com: Investors have historically underweighted international exposure in their portfolios. Is that still true?

Kuczma: The general perception of emerging markets is that of higher risk. But all the problems that triggered the latest global crisis started with the U.S. housing market and the U.S. banking sector. We don’t have that balance of risk coming from emerging markets anymore, but from the U.S.

Emerging market banks tend to be less dependent on funky financial-engineering products, so they are less vulnerable to the sort of collapse we saw in the U.S. They don’t suffer from as much risk as they used to. Emerging markets also have less debt relative to the U.S. market. The balance of risk is changing and investors are taking notice.

IU.com: Should investors keep looking at emerging markets, then, in the near future?

Kuczma: More and more investors are looking to diversify their portfolios, and investing in emerging markets is an obvious choice if looking for growth. In terms of valuation, emerging markets are also a solid bet. The MSCI Emerging Markets Index is trading in line with developed market levels. Emerging markets are no longer a bargain, but they present more potential for growth. The region could, in fact, trade at a premium to developed markets ahead.

IU.com: What are your favorite developing countries right now?

Kuczma: When people think of emerging market hot spots, they think of BRIC. China, in particular, has received a lot of attention, but it is losing luster. Demand for commodities there boosted inventories a lot, multiples are a bit stretched, there isn’t enough stimulus and the country has started to stabilize. Investors are starting to underweight China a bit.

Brazil, on the other hand, is still a hot market. It has recently gone through a large cycle in bringing down interest rates. If you look at three years ago, the benchmark interest rate in Brazil was around 20 percent. It’s now 8 to 9 percent. That’s a large drop and it is driving personal consumption. Also, the debt-to-GDP ratio is 45 percent; way below its peers. The mortgage-to-GDP ratio is 2 percent. Households remain under-levered, and that’s freeing up personal income. We are bullish Brazil in the long term.

IU.com: What about Russia? The Russia RTS Index has doubled since the beginning of the year. What’s the outlook for that country?

Kuczma: Russia depends heavily on the price of crude oil. Their economy is very industrialized. As oil settled around the $65-$70/barrel level—as opposed to the lower $30/barrel level we saw before—the economy was able to bounce back up. The country also benefits from geographical location, as it borders China, which has major demand for Russia’s energy resources.

If you look at the Market Vectors Russia ETF (NYSEArca: RSX), which is the largest Russia ETF in the U.S., you will see that there’s been a big flow of assets into that. We are definitely bullish Russia going ahead.

IU.com: Are there other smaller frontier markets attracting interest?

Kuczma: Absolutely. Investors took a lot of money out of those markets for their perceived risk. But that left the region with pretty attractive valuations. Indonesia and Vietnam are both regions of growing interest. They are facing strong growth, investments in infrastructure, all of which have large effects on the economy and open up a lot of opportunities. On that note, investors are also warming up to the economies in Africa, and the Middle East region remains overlooked.

IU.com: Emerging markets are leading the global economic recovery. Have they come too far too fast?

Kuczma: They have posted pretty large gains year-to-date. The iShares MSCI E.M.I.F. (NYSEArca: EEM) has gained 64 percent year-to-date. If you go back to two-year returns, it’s pretty explanatory: We saw a drastic sell-off last year. People oversold emerging markets last year to take risk off the table. Now, we see a sustainable growth outcome. The region is turning up pretty attractive valuations. It will continue to go up moving forward, but not as fast as we’ve seen since the beginning of the year.