Emerging Market Equities

A positive long-term outlook

Good long term fundamentals. Emerging Markets represent four-fifths of the world’s population, three-quarters of its land-mass, two-thirds of its foreign exchange reserves and close to half of global output when adjusted for exchange rates (PPP), yet they account for only 13% of world equity by market capitalization. * It’s clear that the potential for growth is exceptional over the medium to long-term. Emerging market equities rose by almost 80% in 2009, and valuations are now less attractive than they were at the beginning of 2009. Stock selection is critical in this environment **.

An increasing number of well-managed companies. Companies in Emerging Markets have become better managed and more transparent in order to compete for the increased investor cash flow into the region. Companies now have stronger balance sheets, are more profitable and increasingly committed to maximising shareholder value.

Diversification benefits to your portfolios. While the argument that Emerging Markets have decoupled from developed markets has been debunked, they do have a demonstrably important role to play in portfolio diversification.

Short-term growth potential

Resilience to the economic downturn. While Emerging Markets are not immune from the global economic slowdown they have less debt than developed nations. Economic reform has been a great help: the adoption of prudent fiscal and monetary policies by governments has fostered stability and growth.

Strong local demand bucks the global trend. Emerging Markets have stronger economic growth potential than their mature counterparts, supported by a young and growing population, durable consumer spending and a burgeoning middle class.

Global Emerging Markets will lead, not follow, the recovery. Global Emerging Markets have a much-reduced dependence on developed economies. Exports to other emerging economies are growing and these economies are also seeing increased spending and investment at home. While developed markets need to save more, resulting in muted growth, Emerging Markets have saved in the past and can now move to boost demand.

* Source: BofA Merrill Lynch Global Equity Strategy, BP, CIA World Factbook, IMF World Economic Outlook, MSCI, February 26, 2010.
** Source: Lipper, MSCI Emerging Markets Index. Total return, USD, 12/31/2008 - 12/31/2009