Emerging Markets and Your Portfolio
Emerging markets have become an increasingly popular topic in financial publications and other media. What are emerging markets? Definitions vary, however the term “emerging markets” generally represents countries whose economies are expanding rapidly (usually measured by GDP growth). Emerging markets are on the path to becoming “developed markets” as evidenced by increasing liquidity in financial markets. Countries include: Brazil, Russia, India, China, South Korea, and Indonesia. Diversification According to Modern Portfolio Theory, diversification benefits are enhanced as correlation between inputs decreases; combining asset classes that behave dissimilarly may reduce the volatility of the overall portfolio. Compared to other equity asset classes, emerging market stocks have one of the lowest correlations to large US companies. Returns Emerging economies experience faster GDP growth than mature economies due to increased industrialization and technological advancement. Because risks are numerous and substantive (see below), emerging markets exhibit higher average returns. Risks Emerging market companies face several substantial risks compared to developed market companies. Potential risks include: political instability, corruption, market inefficiencies, lack of regulatory oversight, and illiquidity. As a result, emerging market stocks exhibit significant volatility compared with other equity asset classes. Should I invest? Whether you should invest in emerging markets depends on your overall investment goals. Emerging market equities may be an attractive addition to a well-diversified portfolio of core holdings. Investment in emerging markets is becoming increasingly accessible through various mutual funds and exchange traded funds (ETFs). Talk to your financial planner about potentially including emerging markets in your portfolio.