In 1997, with Asia in the grip of a debilitating financial crisis, the United States came to the region’s rescue. The Federal Reserve cut interest rates, and American shoppers used their strong dollars to load up on bargains from Thailand to Malaysia to China.

What a difference a decade makes.

Today, it is the emerging economies of Asia — and others like them around the world — that are offering economic help to developed nations. As growth slows in the United States, Europe and Japan, some experts believe it will be the rising power of emerging markets that keeps the global economic machine humming.

To quote Bogart, “this could be the beginning of a beautiful relationship.”

No less an authority than The Economist took note of the dramatic transformation of the global economy: “The world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging markets.”

Gain from pain
The revolution took root amid the pain of the 1997 crisis, which finally compelled many developing countries to deregulate their economies, reduce fiscal deficits and slash inflation. The image of emerging markets as debt-soaked spendthrifts with weakening currencies no longer rings true.

“In the 1990s, emerging markets were more highly dependent on commodities and exports than they are now,” says Greg Behar, an investment strategist with Northern Trust Quantitative Management Group. “But they’ve since gotten their financial houses in order by making several important economic and financial reforms. The results are very impressive.”

Impressive, indeed.

Last year, emerging nations grew roughly four times faster than their developed counterparts. Three-quarters of the world’s foreign exchange reserves are stacked in the bank vaults of developing countries, most of which run budget and trade surpluses. Many developing countries allow their currencies to float freely in world markets, thus minimizing the odds of a sudden collapse. With some notable exceptions, inflation is low and well contained.

Rising middle class
Of course, investors will recall the periodic financial upheavals that rocked emerging markets in the past.

In addition to the Asian Contagion of 1997, Mexico, Brazil and Russia also suffered painful busts after enjoying multiyear booms. And for all the recent improvement, political and currency risk remain higher in developing nations than in their rich counterparts. Those factors argue for remaining cautious toward what is still a volatile asset class.

Yet it’s become increasingly difficult for investors to ignore the group’s long-term potential.

Emerging countries are home to 85% of the world’s population and generate almost half its economic output, an amount that experts project will rise to almost two-thirds by 2025. China, India, Mexico, Russia and Brazil each are expected to have larger economies than Germany, Britain or France by 2040.

But emerging markets aren’t just about numbers. They’re about people striving for a better life.

Though progress has been uneven, many emerging economies have developed a middle class whose incomes are growing fast enough to afford consumer goods. That’s an important departure from the recent past, when the fate of developing nations rested upon using weak currencies to induce customers in rich countries to buy televisions, apparel and footwear.

Making the cut
But emerging markets are not a homogenous asset class. In fact, there is no single definition of what an emerging market is.

The World Bank classifies the group according to national income, a process that results in more than 100 nations qualifying as “emerging.” But financial firms that develop market indices or benchmarks take a different approach.

“The benchmarks are looking at a multitude of mostly investment-related factors, such as the breadth and depth of a country’s equity market,” says Shaun Murphy, co-manager of the Northern Emerging Markets Equity Fund.

“They want to see a certain level of ease and fairness for foreigners to invest.”

By that standard, only 25 nations make the cut for inclusion in the MSCI Emerging Markets Index, a popular benchmark for the asset class.

Proceed cautiously
However they’re classified, Behar believes that emerging markets are too big and dynamic for investors to ignore and should be a part of an investors overall asset allocation plan.

But be careful.

“Buying what’s hot today happens in all asset classes, but it’s especially important to resist that temptation in emerging markets because of the volatility,” Behar cautions. “You need to take a long-term view of emerging markets and not chase return.”

In fact, valuations among emerging market stocks are now about equal to those in developed markets, though still well below past peaks.

Murphy also warns against putting too much money into a single country, region, or group of countries, like the so-called BRICs (Brazil, Russia, India and China). There has been a historical tendency in emerging markets for yearly returns to revert to their long-term averages. Countries that are at the top of the leader board one year can sink to the bottom the next.

Core exposure
Those wide swings in performance might argue for using index funds with some money earmarked for emerging markets.

Murphy says that while skilled active managers can add value, they also face a myriad of hurdles not encountered by index funds, such as much higher operating expenses and the need to be nimble in exiting top-performing markets before they begin to tumble toward the bottom.

“Taking a passive or index approach means that investors get maximum diversification to what is an inherently volatile asset class,” asserts Steven Santiccioli, who co-manages the Northern Emerging Markets Equity Fund along with Murphy. “Our fund is designed to mimic the MSCI Emerging Markets Index, so it provides core exposure to a group of countries that offer the potential for added diversification and growth in the coming years.”

Naturally, that growth will come in fits and starts. What’s important is for investors to take a position and stick with it.

“You need to have exposure to the asset class to benefit from the evolution in these fast-growing economies,” says Behar. “Investors seeking a truly diversified portfolio should include exposure to emerging markets.”

Here’s looking at you, kids.