Investing in Emerging Markets (EM) can be a great way to diversify your portfolio and with the recent volatility in global markets, there’s no better time to consider your balance between local and international securities. EM have experienced rapid growth in recent years. Around thirty years ago, emerging markets made up about 1% of world equity market capitalization, and just 18% of global GDP. However, today the story is much different, with EM now representing nearly 60 percent of global growth and more than 50 percent of global GDP.

Despite this, the majority of investors have quite small allocations to them. SG Hiscock & Company is an award-winning boutique fund manager based in Melbourne, specialising in Australian Equities and Property Securities. If you are new to investing in EM, read on to find out if it could be a smart option for you.

What is an emerging market?

An emerging market economy is purely an economy that is transitioning from low/middle income to high income. An emerging market economy already shares some of the characteristics of a developed market such as a functioning stock exchange where shares can be easily traded, access to debt and some form of government regulation, but does not meet enough standards to be classified as one. Once dominated by agriculture and cheaper manufacturing, today EM countries are home to some of the world’s fastest growing economies. EM economies include powerhouses such as China, India, Indonesia and Brazil, as well as smaller economies like Morocco, The Philippines and Thailand.

The rise of emerging markets

Over recent years, emerging markets have become more and more important to the way the global economy functions. By taking a look at your clothing labels and household appliances, it’s easy to see that China now produces over 25% of everything manufactured worldwide. But it’s not just China powering ahead, the economies of South Africa, Brazil and India are also booming and as money flows in, these economies are beginning to account for a much higher percentage of global GDP. It doesn’t look like stopping any time soon either. It is estimated that by 2040, the output of emerging economies will be double that of the developed world. Despite this, they still account for just a small percentage of most Australian investment portfolios.

What percentage of my portfolio should be in EM?

Whilst there is no standard right answer for everyone, for most people it will depend two things – how willing they are to take a risk and also how long their investment period will be. International markets often exhibit greater volatility which can make them riskier in some ways. While allocating a high percentage (greater than 50%) is most likely too aggressive for most investors, especially those who are new to international investing, if you only invest a small amount (2-5%) you may not be able to take full advantage of the many benefits that international markets have to offer, including the ability to diversify against any domestic downturn.

For the average investor, a balanced portfolio may mean the weight to emerging markets will move from 2 per cent, where the average currently lies, to 6.25 per cent, whereas Australian equities may fall from 25.5 per cent to 21.25 per cent. This will create a more even between local and international equities.

Emerging markets are going to become a much larger proportion of global listed equity markets over time, so reducing the exposure to Australian equities in favour of emerging market equities will most likely create a strong and successful portfolio. Need more advice? At SG Hiscock, our approachable and professional team put your needs first to find the investment opportunities that best suit your goals. Contact us today on 03 9612 4600 and let us guide you in the right direction.