Opportunities Rising
The case for emerging market investing

By Amy Schioldager, managing director, Barclays Global Investors

With the elimination of the foreign property rule in Canada almost two years ago, many pension plans and institutional investors have increased or are exploring increasing their international allocations. Beyond traditional foreign investment choices, emerging markets represent an increasingly attractive investment opportunity for a well-diversified portfolio. While not a new asset class, there has been an increase in the understanding, transparency and availability of investment vehicles in these markets over the past few years.

Today’s typical allocation to the developed international markets falls short of the complete investment set. Emerging markets represent a significant portion of global output and offer long-term growth potential, let alone unique industries and companies. As a result, early entrants to the asset class have realized outsized returns and improved portfolio diversification. Based on such attractive attributes, among others, the emerging markets asset class is experiencing a growing institutional commitment.

Emerging market fundamentals
Nearly eight out of 10 people live in emerging economies, contributing over one-quarter of global output. However, such market economies represent only a small but growing proportion of global equity market capitalization. From a growth perspective, such markets are delivering above-average GDP growth relative to the developed international markets, including Canada and the United States. The 10-year compound annual growth rate of emerging market economies combined has significantly outstripped that of the developed international markets, including the U.S. and Canada. Furthermore, the consensus growth outlook for the emerging markets remains robust.

Investors may be surprised to note that some emerging markets, such as South Korea, Taiwan, and China have larger market capitalizations than developed markets like Norway, Ireland or Denmark. Many notable companies exist within the ranks of emerging economies. To give a sense of the magnitude, Gazprom, PetroChina or Samsung Electronics have larger market capitalizations than Encana or The Royal Bank of Canada. Two-thousand six was also a banner year for capital market activity in the emerging markets, producing four of the five largest global IPOs. Investors can expect this trend to continue as such markets further develop and look to global capital flows to fund market-leading growth and expansion.

Emerging markets have produced market-leading returns over the past 10 years. More recently, such markets have dramatically outperformed equity and bond indices from the developed markets as fresh capital seeks out the expanding opportunity of these growth areas. As one may readily surmise, increased investor attention to these markets as recent as 2002-2003 has contributed to meaningful outperformance. Beyond returns, investors will appreciate the increased diversification delivered by investing in the asset class.

In summary, emerging markets are an important and growing segment of the world economy. As an asset class, they provide diversification benefits and may offer opportunities for higher returns. Investors therefore should consider emerging markets as a strategic component of their international allocation.

To view Amy Schioldager's presentation, click here.