Money Management: Benefits of investing in emerging markets

By Marijoyce Ryan
Posted: 5:37 pm Tue, January 31, 2012

Marijoyce Ryan

Over the course of many years, the concept of investing in emerging markets seemed, well, foreign to many. Terms such as exotic, risky, third-world, etc. were associated with it. Now, emerging markets are popular with investors seeking wealth preservation and growth. Let?s take a look at what are emerging markets.

The term emerging markets was coined by the World Bank?s International Finance Corporation in the early 1980s. Typically, emerging markets are countries in the process of industrialization, with the potential of higher gross domestic product growth per capita than more developed countries.

Generally speaking, emerging markets are identified by a growing population experiencing a substantial increase in living standards and income, solid economic growth and a relatively stable currency. Some examples of emerging markets include China, India, Taiwan, Indonesia, Russia, Czech Republic, Turkey, Brazil and Chile, among others.

Over the five-year period ending 2010, the average annual GDP of the United States was 0.9 percent. Compare that to the same data of the following countries:

Russia???? 3.6 %
China????? 11.2 %
India?????? 8.3 %
Brazil????? 4.5 %
Turkey???? 3.1 %
Malaysia? 4.4 %

As a whole, emerging markets as a percent of the world?s GDP went from 32 percent in 2000 to 45 percent in 2010. In contrast, the developed North American economies decreased from 33 percent to 26 percent over the same time frame (according to Bloomberg Finance LP).

As the emerging economies of the world continue to grow, consumption of all goods and services increases ? thereby increasing demand. While these markets have experienced higher volatility in their equity returns, they have also produced better long term returns than have the collective markets of the developed economies (Morningstar data through 2010).

See the equity performance numbers below:

?	Emerging Markets	United States Market
Past 20 Years	12.2%	9.1%
Past 10 Years	16.2%	1.4%
Past 5 Years	13.1%	2.3%

Contributing to the return of emerging market equities is currency translation. As the U.S. dollar decreases versus other currencies, it enhances the return because when gains are taken in emerging markets and converted back to dollars, the investor receives more dollars. The reverse is true as well. Currency is one of many risks. Others include political and social events/problems, taxes, liquidity and other restrictions.

So, what is the message to the average investor? As part of a prudently diversified portfolio, one should have exposure to emerging markets for the long term benefits of wealth preservation and creation. The key is ?long term.? This implies multiple years ? not months. Over the course of many years, the impact of volatility is diminished. As the migration of growth and wealth creation is moving to the emerging markets, so too should investors allocate assets to those markets. Over a 20-year period, emerging market stocks have produced superior returns to not only our stock market but also to the international developed markets. This relationship should continue in the future.

A skilled investment manager can assist you in navigating investment risks and recommending the appropriate level of emerging market allocation for your portfolio.

Marijoyce Ryan, CPP, is vice president of fiduciary services for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully?s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.

Source: http://nydailyrecord.com/blog/2012/01/31/money-management-benefits-of-investing-in-emerging-markets/

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