If you left your money in one of the broadest investing vehicles available in the U.S. today, you lost quite a bit during the past 10 years after considering inflation. As of this writing the 10-year annualized return on the largest S&P 500 index fund — the Vanguard 500 Index (VFINX) — is -0.30%. On the other hand, if you put your money in BRIC stocks over the past 10 years, you made out like a bandit. Russian equities saw an eight-fold appreciation, in Brazil and India you nearly tripled your money and in China you more than doubled it with much less risk.

Why such divergent performance? Economic growth in emerging markets over the past decade was much faster than in the developed world as emerging economies were growing from smaller bases. And looking forward, this is likely to be the case for the coming decade.

Developed economies in North America and Europe are projected to have rising deficits and debt burdens in the next five years on top of much higher level of indebtedness — slowing economic growth. BRIC countries are seeing falling levels of deficits and debt burdens with already much lower levels of indebtedness — acting as an accelerator of economic growth. No surprise that BRIC equities are likely to again be the stars of the next 10 years.

For 2010, Russia is likely to grow GDP by 4%, Brazil by 7%, India by 8% and China by 10%, yet no BRIC stock market has seen real gains so far this year. The euro crisis has been partly to blame for the flight of capital away from emerging markets — an erroneous strategy, in my view, given the superior fundamentals. The other reason is that most BRIC central banks are tightening monetary policy to take away the extraordinary measures taken in 2009.

This flat performance in 2010 is a huge opportunity for investors. The four BRIC picks below have just reported (or are about to report) great earnings and/or improving operational performance.  

The Brazilian benchmark Bovespa Index trades at 11.9 times 2010 earnings estimates, while earnings for Brazilian equities are likely to grow 30% or more. Barring a full-out E.U. collapse, it is extremely unlikely that Brazilian stocks will remain flat in 2010.

Four Safe Emerging Market Picks

Brazilian oil giant Petrobras (NYSE: PBR) is a contrarian pick because it has to raise new funds to develop huge oil finds off the coast of Brazil. The deep-water oil spill in the Gulf is making investors skittish about deep-sea oil. Petrobras has lagged the Brazilian market all year, but with a single-digit PE of 9 and dividend payout in the 3% to 5% range, based on earnings this recapitalization uncertainly is an opportunity to buy one of the cheapest energy assets in the world today. The company reports earnings tonight after the close, which I expect will surprise to the upside.

Chinese equities have been the weakest BRIC performers due to central bank tightening measures, but they are also trading near their lowest valuations in the past five years. It is only normal that the stock market is under pressure when the central bank tightens.

China Life Insurance (NYSE: LFC), the nation’s largest insurer, just reported a 67% jump in first quarter profits, yet the shares are down 10% this year. I fully expect China Life to report a blockbuster quarter in the next three months, at which point the market should wake up to the realization that the correction in Chinese equities does not warrant such valuation discounts. The stock may rise 20% to 40% by the end of the year as the company continues to report stellar earnings.

Russia is the most controversial BRIC country due to its treatment of foreign investors, which is also why it offers the cheapest stocks market valuations. Still, neither the West, nor China or India can do without Russian resources, so investing in promising companies leveraged to global growth still makes sense.

Lukoil (OTC: LUKOY) has the second largest hydrocarbon reserves of any publicly traded oil company on the planet. ConocoPhillips (NYSE: COP), which owns 20% of Lukoil, is selling half of its stake in order to pay down debt and buy back stock. This may happen in a bloc transaction with another firm later this year or as a secondary offering, so it may weigh on the stock in the short term. But it also gives you an opportunity to buy an undervalued energy company yielding 3% with a PE of 7, with ample room for growth for decades, not years. The company is not reporting earnings anytime soon, but its well-politically-connected management got a hint of large tax break for Caspian oil development from Prime Minister Putin, which could be a big catalyst for the stock.

Finally, Indian stocks always trade at more expensive valuations, but for good reason. The country has a unique appeal because its economic growth does not depend on exports, but rather mostly on domestic demand.

And there is unique Indian pharmaceutical company that has a skilled labor competitive advantage — Dr. Reddy’s Laboratories (NYSE: RDY). The company has just begun reporting profits after as restructuring and expects to be debt free in three years. Not to mention that its management has a long history of success in the highly-competitive field of generic pharmaceuticals. Earnings for pharmaceutical companies are notoriously erratic, but the long-term competitive advantage here is clear.

As a recap, if you are looking for sustainable earnings growth, look at BRIC equities. This E.U. crisis is giving you an opportunity to buy them on the cheap, but that won’t last for long.

For further information on which BRIC equities we favor in the current environment, click here now.

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