Pretty much every serious investor has a favourite investment thesis or theme that they employ. Many of these are mainstream, which, by definition, means that a number of people do something similar. One such theme is to invest disproportionately in either dividend paying stocks or stocks that have a history of raising dividends. Some people like to invest in the so-called FAANG stocks. Some people like to speculate and call it “investing” by putting large percentages of their assets into new ideas like cannabis stocks. The point is that there are different strokes for different folks and virtually everyone can justify their own peculiarities. People seldom resist their own ideas.
I’m like most people. For a generation now, I have been pounding my fist on the table about the need to address what I see as a chronic under-investment in emerging market equities. To me, this asset class makes sense from virtually every meaningful perspective: historical risk, expected return, co-variance, current valuation, the prognosis for growth… you name it.
In a world where overall GDP growth is anemic and not likely to improve materially in our lifetimes, emerging economies are the only ones where economic (specifically, GDP) growth remains strong. These are rapidly industrializing countries which are mostly stable politically, young and full of ambitious strivers who want access to a more Western way of life. Many people are of the view that the key to a growing economy is a growing middle class. There are far more people entering middle-class status in emerging economies than anywhere else.
The thing that many traditionalists often miss is that emerging markets are not a “fad” or a small sliver of the global economy that can be easily overlooked. I cannot help but wonder if the problem is one of traditional branding since the reticence seems tied to the real estate the term takes up in people’s minds. What if these were called “rapidly expanding economies” — would people think differently about investing there?
The Morgan Stanley Capital International Emerging Market Index lists 23 countries that make up this segment. They are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Qatar, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates. Another eight countries – Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore and Vietnam – are included in some, but not all, listings. India and China alone comprise about 40% of the Earth’s labor force and population. Recently, it has been shown that the economic output of India and China has outpaced the output of both the European Union and the United States. That’s hard to overlook.
Depending on whom you ask (different organizations use different statistics), the market capitalization for emerging economies is likely somewhere between 10% and 15% of global stock markets. Stated differently, if you were to think of yourself as a “citizen of the world” with no bias for your home country or any other big economies nearby, you’d likely have 10% to 15% of your equity portfolio in emerging market stocks. For the record, all of my discretionary clients have an allocation of 15% of their total equity and alternative position set aside for emerging markets.
My experience, when prospective clients come to see me for the first time, is that most of them have no emerging market exposure, and those that do almost always have less than 5% of their equity positions in emerging markets. I believe this is an obvious opportunity for people with a long-term perspective to improve their overall investment experience. Emerging markets are a must-own in the new global economy. Yes, in spite of this, many people don’t own them. That combination (comparing what is to what I believe ought to be) makes emerging markets quite likely the most under-owned asset class in the world. Virtually every person reading this should be adding to their current position to some extent.
John J. De Goey, CIM, CFP, FELLOW OF FPSC (the author) is a registrant with Wellington-Altus Private Wealth Inc. (WAPW). WAPW is a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The opinions expressed herein are those of the author alone and do not necessarily reflect those of WAPW, CIPF or IIROC. Investors should seek professional financial advice regarding the appropriateness of investing in any investment strategy or security and no financial decisions should be made solely on the basis of the information and opinions contained herein. The information and opinions contained herein are subject to change without notice.
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