The most under-owned Asset Class

Pretty much every serious investor has a favourite investment thesis or theme that they employ.  Many of these are mainstream, which, by, definition, means that a number of people do something similar.  One such theme is to invest disproportionately in either dividend paying stocks or stocks that have a history of raising dividends.  Some people like to invest in the so-called FAANG stocks.  Some people like to speculate and call it ‘investing’ by putting large percentages of their assets into new ideas like cannabis stocks.  The point is that there are different strokes for different folks and that virtually everyone can justify their own peculiarities.  People seldom resist their own ideas.

I’m like most people.  For a generation now, I have been pounding my fist on the table about the need to address what I see as a chronic under-investment in emerging market equities.  To me, this asset class makes sense from virtually every meaningful perspective: historical risk, expected return, co-variance, current valuation, prognosis for growth… you name it.

In a world where overall GDP growth is anemic and not likely to improve materially in our lifetimes, emerging economies are the only ones where economic (specifically, GDP) growth remains strong.  These are rapidly industrializing countries which are mostly stable politically, young and full of ambitious strivers who want access to a more western way of life.  Many people are of the viewpoint that the key to a growing economy is a growing middle class. There are far more people entering middle class status in emerging economies than anywhere else.

The thing that many traditionalists often miss is that emerging markets are not a ‘fad’ or a small sliver of the global economy that can be easily overlooked.  I cannot help but wonder if the problem is one of traditional branding, since the reticence some seems tied to the real estate the term takes up in people’s minds.  What if these were called “rapidly expanding economies” – would people think differently about investing there?

MSCI lists 23 Emerging Market countries

The Morgan Stanley Capital International Emerging Market Index lists 23 countries that make up this segment. They are Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Qatar, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, and United Arab Emirates.

Another eight countries: Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore and Vietnam are included in some, but not all, listings.  India and China alone comprise about 40% of the earth’s labour force and population.  Recently, it has been shown that the economic output of India and China has outpaced the output of both the European Union and the United States.  That’s hard to overlook.

Depending on who you ask (different organizations use different statistics), the market capitalization for emerging economies is likely somewhere between 10% and 15% of global stock markets.  Stated differently, if you were to think of yourself as a ‘citizen of the world’ with no bias for your home country or any other big economies nearby, you’d likely have 10% to 15% of your equity portfolio in emerging market stocks.  For the record, all of my discretionary clients have an allocation of 15% of their total equity and alternative position set aside for emerging markets.

My experience, when prospective clients come to see me for the first time, is that most of them have no emerging market exposure and those that do almost always have less than 5% of their equity positions in emerging markets.  I believe this is an obvious opportunity for people with a long-term perspective to improve their overall investment experience.  Emerging markets are a must-own in the new global economy.  In spite of this, many people don’t own them.  That combination (comparing what is to what I believe ought to be) makes for emerging markets quite likely being the most under-owned asset class in the world.  Virtually every person reading this should be adding to their current position to some extent.