London, England

With gains exceeding 75% this year there's no doubt the emerging markets are the best performing global index in late 2009. No other global benchmark, in fact, has come close to the MSCI Emerging Markets Index over the last decade.

I remain bearish on global stocks and especially the overheated and expensive emerging markets where "bubbles" are now in progress in Chinese real estate and Brazilian banking. I also believe the quality of companies in India remains poor and not worth the risk premium accorded by investors. Russia is basically lawless and demands high oil and gas prices to sustain its legitimacy.

I continue to warn of an impending explosion or blowup in the widely accepted view that emerging markets are the hottest thing to own since sliced bread. We all know why emerging markets should be widely owned by investors: bulging foreign-exchange reserves, rising creditor nation status, trade surpluses, low debt-to-GDP ratios and, of course, high-flying economic growth rates or GDP.

This story has not only been baked into current prices it's probably overcooked at this point. It's conventional wisdom that this sub-asset class will dominate stock market returns over the long-term.

Spearheaded by China's enviable growth rate and other powerhouses like Brazil, India and Russia, the BRICs are all the rage this decade. But are they worth the risk now?

Credit spreads on emerging market debt compared to U.S. Treasury bonds are absurdly low. Brazilian ten-year paper commands a spread of just 168 basis points or 1.68% over benchmark Treasury bonds – an unbelievable statistic. The markets have firmly voted that Brazilian inflation is a thing of the past, lower rates lie ahead and that further credit upgrades are possible.

Brazil, however, is not as cheap as she first appears to be.

Banks are expensive and highly overvalued at this point as they command big premiums compared to U.S., European and especially Japanese banks based on assets and net cash-flow. Most investors believe Brazilian assets are cheap; but this is not the case if you go beyond traditional measures like price-to-earnings ratios and book value.

China is another time-bomb waiting to go off. Property prices across the 20 largest cities are seriously inflated and bank credit, until recently, has been running north of 25% year-over-year. Though I don't doubt China's enormous growth capability, the quality of the earnings and bank lending remains highly suspect.

Historically, property shares peak well ahead of the broader market in all countries. This was the case in the United States back in 2005-2006 as the home-builders began to whither.

I suspect the same lies ahead for Chinese real estate companies – now among the priciest growth stocks in the world.

A better way to invest in the emerging markets at this point is to buy U.S. multinationals with a significant sales presence in this asset class, including China. Many large-cap U.S. stocks have performed poorly over the last ten years and should be poised to earn healthy profits from emerging markets revenues combined with a falling dollar – which should also boost earnings. Many of these stocks also provide dividend yields in the 3% to 4% range and are certainly not in a "bubble," unlike stocks in China and elsewhere.

In next month's issue of The Sovereign Individual, I'll tell you why my next recommendation for 2010 and beyond is probably the best risk-adjusted investment to ride this exciting growth trend at a fraction of the volatility associated with emerging markets investing.

Have a good weekend. See you on Monday.