The financial crisis has presented a rare opportunity to invest in emerging markets at low valuations, and those seeking high returns in the long term should invest in these markets immediately, according to emerging markets economist Levi Folk.

Speaking on investing in emerging markets at the Independent Financial Brokers Fall Summit in Toronto on Tuesday, Folk told brokers he expects investments in emerging markets to reward investors once the economic downturn subsides. Specifically, he said he expects returns from investments in these markets in the next three years to be higher than they were in the past three years.

While emerging markets have not been exempt from the damage of the credit crisis, the fact that the crisis originated in the developed world means emerging markets are being impacted to a much lesser extent, according to Folk. Writedowns among financial institutions, for instance, have hit developed countries and not emerging ones, Folk noted. In addition, he said the credit markets in these countries are in stronger shape than those of developed economies.

“Chinese and Indian banks did not participate in this lending frenzy,” he said. “They’re in much better shape to lend right now.”

The fundamentals of many emerging economies also remain healthy, according to Folk. He pointed to such examples as China’s current account surplus, and its high savings rate, at roughly 25% of household income.

The stock markets of these countries have taken a hit as nervous investors pull cash out of many of their investments. The markets in China and India, for instance, are at near-lows. But Folk said these low levels offer buying opportunities since the markets have potential for a strong recovery. He pointed to the extreme recoveries these markets have made following previous stock market freefalls, including value increases of 105% from a past market bottom for Chinese equities, a 162% rebound in India, and 616% growth in Russia.

Folk acknowledged that growth is expected to slow in these emerging countries as the global economic downturn takes its toll. But he noted that the IMF expects GDP growth in China to be 9.7% this year, and 9.3% next year. While this is slower than the double-digit growth rates it has seen in recent years, Folk said 9% GDP growth is far from weak.

“It’s hardly a catastrophe in China,” he said.

Furthermore, the recent softening in commodity prices has been good news for both China and India as major importers of raw materials. With cheaper commodities such as oil taking pressure off inflation, the governments of these countries have more freedom to lower interest rates and encourage continued investment, Folk said.

One key area of growth in emerging economies going forward will be infrastructure, Folk said. Specifically, China alone is expected to spend $1 trillion on infrastructure between 2007 and 2011, despite an economic slowdown. India, too, will be pouring generous amounts of investment into infrastructure as large portions of its massive population migrate to urban areas.

“The spending is still there,” Folk said.

In addition, the middle class in both China and India continues to grow, which will create a major source of spending and boost demand for cars and oil, and a wide range of other goods and services. This will foster long-term growth in these countries, Folk said.

“Demand for everything is going to rise,” he said. “If these emerging economies are going to continue to grow over the next few decades, it makes you think that’s a place where you should consider putting your money.”

Folk warned that emerging market investments involve risk, since they’re volatile. He said it’s best to take a long-term approach to such investments.

“When you invest in the long term, volatility doesn’t become a major issue,” he said.

IE