Emerging Market Stocks Are Shockingly
Underweighted
The Dynamic Wealth Report
January 18, 2011
by Corey Williams, Editor
If you’re like most investors, you probably invest primarily in US
stocks, mutual funds, and ETFs.
Most investors tend to stick with what they know. And investing in
America was great for your parents and grandparents. But in order to be
successful today, you need to invest in the world.
Simply put, the greatest growth opportunities are now found outside of
the US.
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But what I discovered about investing in emerging markets was
shocking!
According to Morningstar, at the beginning of last year, only about 2% of
mutual fund and ETF assets are in emerging market equities.
And that’s not all, according to the International Monetary Fund,
emerging-market stocks have grown as a portion of total US holdings
from 1.63% in 2004 to 2.41% in 2009. But during the same time,
emerging-market stocks grew from 8.7% to 15.9% of total world market
capitalization.
So while investors slowly inched up their emerging markets investments,
the area was exploding!
Here’s the bottom line…
The average American investor is severely underweight emerging markets.
Even conservative estimates indicate investors should have at least 5%
of their portfolio in emerging market stocks. But I believe you should
have 10% to 15% of a portfolio in emerging markets.
Any way you slice it, investors have a long way to go before emerging
markets are adequately represented in their portfolios.
With so many people pounding the table about emerging markets, why
haven’t investors been quicker to act?
It all comes down to risk… or at least the perception of risk.
Emerging markets have been labeled as riskier than developed markets. But over the last few years, that’s all changing. Emerging markets have
demonstrated they can be much less risky than most people believe.
The truth is many emerging economies have better economic fundamentals
than developed economies.
Just look at the facts…
The consumers, corporations, and governments in emerging markets
typically have lower debt levels. And they’re not dealing with the
hangover from the housing bubble.
And to top it off, emerging markets have become much more stable
politically and socially. And corporate governance has become much
stricter.
Yet their economies are still growing faster!
So I’m left wondering… What exactly makes emerging markets riskier?
It seems like many of the old risks making emerging markets “risky” have
been diminished if not eliminated altogether. Yet they still have the
incredible upside potential for earnings growth!
The tides are starting to shift…
Over the last few months, the pace of investment in emerging markets has
picked up steam. Some are speculating it’s tied to the flood of
liquidity from the US and Europe.
And it’s true, to a certain extent. The Fed’s latest round of
quantitative easing has spurred investment in stocks in developed and
emerging markets alike. But by no means has it brought the level of
investment in emerging markets up to anywhere near where it should be.
In fact, I think the increased investment in emerging markets is just
getting warmed up.
Remember, investors are still woefully underweight emerging market
stocks. If they’re following any type of disciplined strategy, they’ll
need to continue buying emerging market stocks for years to come.
What does that mean for you?
You need to have exposure to emerging market stocks in your portfolio.
Their wealth building potential is simply too big to ignore.
An easy way to get started is with ETFs. The iShares MSCI Emerging
Markets Index Fund (EEM) is a great option. With this one ETF alone, you
can buy into all of the hottest emerging markets.
It holds stocks from China, India, Brazil, South Korea, Taiwan, Russia,
and many more…
Now more than ever, investors need to be investing in emerging markets.
It has the makings of a secular bull market that could last for decades.
The first Real Estate Investment Trust (REIT) IPO of 2011 was well
received. American Assets Trust (AAT), a San Diego-based landlord, raised
over $560 million. The deal is one of the biggest REIT IPOs in the
pipeline for this year.
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