Mexico relies on U.S. tourists crossing the border to visit its beaches and archeological heritage

Sir John Templeton, the pioneer of overseas investing was, above all, a value hound.

“You can always find bargains somewhere,” a 91-year-old Templeton told Forbes magazine.

Templeton had an edge in his search for value: he looked beyond American borders.

“It’s not easy,” he said, “but if you’re going to buy the best bargains, look in more than one industry, and look in more than one nation.”

This may sound obvious to you. (You are reading a newsletter about investing overseas, after all!) But investing in foreign stocks was a radical idea in the 1940s and 1950s when Templeton was starting out on his investment career.

It was also immensely profitable. Templeton’s fund, the Templeton Growth Fund, averaged a 14% annualized return over 50 years (far outpacing the average return of the stock market indexes over the same period).

This poses a big challenge for overseas investors. In Templeton’s time, value was much easier to find than today. That’s because the emerging markets story was much less well known than it is today.

There were simply less investors interested in finding good value emerging market stocks. So these markets were less “efficient” than they are now.

This sounds pretty jargon-y. But it simply means that because there were less investors buying and selling emerging market stocks they were less effectively priced. This led to there being more overlooked bargains.

Nowadays, the emerging markets story is better known (although there’s still only a small amount of North Americans investing overseas). This means less rocks left unturned.

This is especially the case in the so-called BRIC economies of Brazil, Russia, India and China. These are the best known of all the emerging markets. Which means they are increasingly well priced.

That’s why I look beyond the BRICs – to places not yet on investors’ radars…places where it’s easier to find real bargains.

That’s not to say there aren’t still bargains in the BRICS. There are. They are just harder to come across.

But for real bargain hunters, a great place to start your search is the “Next 11” economies: the next set of large-population emerging nations beyond the BRICS.

Last Wednesday, I looked at the first five of the N-11 economies: Bangladesh, Egypt, Indonesia, Iran and Korea. Today, I want to look at the next three: Mexico, Nigeria and Pakistan.

Not all of the N-11 are “buys” right now. Far from it. But there are some hidden gems here.

6) Nigeria

Nigeria has the world’s eighth largest population. And it has purchasing power adjusted per capita GDP of $2,249. This makes it a lot poorer than, say, Brazil (with an equivalent GDP per capita of $10,513) and about even with, say, Vietnam, which has an equivalent per capita GDP of $2,942. Nigeria has rich natural resources and has one of the largest economies in Africa. Problem is Nigerian markets are tough to access directly for North American investors. Conclusion: Nigeria has potential. But it is a “hold” until its markets become more accessible.

8) Pakistan

Pakistan certainly has a large population (over 170 million people). And it has a purchasing power adjusted per capita GDP greater than Nigeria – at $2,713. But a high inflation rate (over 24%) and unusually high levels of political risk make it difficult for me to recommend it. Conclusion: Pakistan is an “avoid” for now.

9) Mexico

The Mexican economy has grown rapidly over the past decade. And it’s on course for growth of 7.6% this year – about three times that of the U.S. Much of this growth has been spurred by free trade deals with North America, Latin America, Europe and Japan. Mexican stocks nearly quadrupled over the decade before crashing in 2008. Now, they are approaching their pre-crash levels once again.

Mexico still has a big gap between rich and poor. But a large portion of its population has been part of the growing middle class since the late 1990s. This is a big plus, as it means more domestic consumer demand. One big drawback is that close to 80% of Mexico’s exports go to the U.S. It also relies on U.S. tourists crossing the border to visit its beaches and archeological heritage. This makes the Mexican economy highly dependent on U.S. demand. And it could prove a big drag on growth, as the U.S. works its way out of its slumpy growth phase.

With the world’s eleventh largest economy by population and a big increase in the middle class there, I rate Mexico a “buy” for now.

There are other countries I’m interested in right now—that I’d also rate a “buy”. I tell you about them in International Living Investor. You can get a free subscription here.