HOW MUCH SHOULD YOU INVEST IN EMERGING MARKETS

The biggest problem for investors at the moment appears to be a reluctance to embrace emerging markets. In a survey of UK investors in October 2007, 70% of them believed that emerging markets would generate better returns than developed stock markets in the medium to long term. Yet just 10% of these investors had an exposure to China, 7% had exposure to India, 4% to Latin America, and 2% an exposure to Africa.

In the 19th century the average British investor would likely have 25% of his portfolio in what we now call emerging markets, and the US was itself a huge emerging market, in the way that China is today. This enthusiasm was eventually abruptly halted by the Great War, and a revival in emerging market investment has been a long time coming.

Now the pat response of many advisers is that you should invest no more than 5% of your portfolio in emerging markets, and a lot of this sort of advice is based on the fear of being wrong (and being sued!). Is this an adequate response from an adviser bearing in mind that:

India and China alone are home to 38% of the world’s population
They represent 20-25% of the global economy*
The prospective growth rates are considerably higher than for the developed world
Yet their stock markets represent only about 5% of world Stock Markets**

Even if you only have no more than than an index weighting, then 10% of your portfolio should be invested in emerging markets.

Dr Mark Mobius, the pioneer in these markets, and very conservative, suggests 12% of portfolios should be in emerging markets. Bearing in mind the long term potential, we certainly believe that you can justify up to 15% in emerging markets, and over the years ahead this weighting should probably go somewhat higher, particularly when periods of weakness are encountered. This pre-supposes that you are happy with the risk, and it is vital that you read and appreciate the Risk section.

In theory you could weight the portfolio exposure based on population, or share of the global economy, or the share of global stock markets, and many variations on these themes. For example:

Emerging markets represent 80% of the world population
Emerging markets are the worlds largest economic bloc, accounting for 50% of the global economy (on a PPP basis)
Emerging markets are (only) 11% of world stock markets

You should probably regard 10% as an absolute minimum.

You don’t just have to consider lump sum investments. Monthly investment is a very sensible way to build an exposure to higher risk investments. During periods of weakness you buy more units at somewhat cheaper prices, thereby reducing your average buying price. For grandparents we have recommended monthly savings into emerging markets for grandchildren for many years – it’s got to be more interesting than stamp collecting!

If you wish to invest monthly please contact us for the application, as this cannot be done online.

* Based on gross domestic product on a purchasing power parity basis
** MSCI All Country World Index

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