I believe that it is more critical than ever for U.S. based investors to pay attention to what is happening outside our borders and particularly in the emerging markets. There appears to be a widening divergence between the expected economic growth rates within the developed world and the emerging markets. According to investment firm PIMCO, GDP growth of the developed world is expected to be in the 1% to 2% range going forward versus 4% to 8% for the emerging markets represented by China, Brazil, Russia, India, and Mexico.1 This trend is nothing new, yet many investors are under exposed to the fastest growing regions on the planet. In my opinion, investments in the emerging markets provide one of the most attractive risk/reward opportunities available.
In my view, the emerging market economies still hold tremendous potential over the next couple of decades. They are undergoing a long term trend of greater economic importance and wealth creation. Emerging market economies have several positive tail winds in place when compared to the developed world: They are commodity rich, have a growing middle class with rising incomes, younger demographics, and ironically, less government debt as a percentage of GDP than the U.S. and the rest of the developed world.2 The rise of the emerging market consumer is expected to gradually replacing the U.S. consumer as the key driver to global demand. Consider the case of General Motors. For the first time ever, during the first quarter of this year GM sold more vehicles in China than in the U.S. But this is not just a China story. Emerging market consumers all over the world are vital to GM. So far this year, roughly 50% of GM’s sales have been outside of the traditional American and European markets.1
So how should investors approach the emerging markets? Consider increasing your allocations to emerging market equities and also investing in the large U.S. based companies that do a lot of business in the emerging markets. Often overlooked is your bond exposure to emerging markets. Emerging market corporate and government bonds appear especially attractive when compared to bonds here in the U.S. and the developed world. Not only are yields much higher on emerging market bonds, but there is a very good chance that emerging market currencies will appreciate versus the U.S. dollar. Investors may benefit from both higher yields and some currency appreciation. None of this is without risk however. Emerging markets have historically been volatile and there are always political and policy risks to consider. Despite the risks, a new world order is upon us. Investors need to embrace the opportunity to invest in those countries that are rapidly becoming a significant economic force throughout the globe.
1. PIMCO’s Emerging Markets Watch, October 2010
2. J.P. Morgan, Guide to the Markets, 4Q, 2010
Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.
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