Wednesday, April 8, 2009

The Continuing Case for Emerging Markets

A curious state of affairs is unfolding, a reversal of roles so to speak. After many years of Emerging Markets on life support provided by the International Monetary Fund as debtor nations, the so called Emerging Markets have made tremendous strides politically and economically.

On an aggregate basis emerging markets have become more stable than ever. As beneficiaries of a recent boom (prior to the bust) in commodities, they shored up foreign reserves and balanced budgets. Their banks and economies are less leveraged than our own.

To make a sweeping generalization is usually dangerous, but in general the lesser developed countries have moved to more stable governments, increasingly structured legal systems, more balanced economies and a growing middle class while keeping the long term economic driver of youthful demographics.

The following simple facts should induce investors to look more seriously at emerging market investments in the coming years:

* Recently and for the next few years, emerging market economies are expected to contribute 50% of all global growth.

* Emerging markets comprise 20% of Global GDP, but only 10% of investment market cap

* 85% of the world's population lives in emerging market nations.

The diversity within the emerging markets suggests that diversifying across the sector is a prudent way to participate in what looks to be one of the more vibrant investment opportunities in coming years. It is because of the greater risk and internal market inefficiencies that greater returns can be anticipated. But that with that return higher volatility should be expected.

John Barnyak