Brazil recently overtook the UK as a larger economy, and as outlined in this article on Motley Fool this will be a taste of things to come, with France, Italy and Germany all set to lost their standing in the league table.
There has been much written about the growth of emerging markets and many investors realise how important it is to include this exciting area of development within a portfolio. However those same investors have also seen values fall over the past couple of years as the emerging economies begin to feel the strain of broader global troubles.
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What is interesting to me is the emphasis placed on emerging markets within a portfolio. Typically seen as higher risk and volatile, professional investors have conservatively placed small proportions of a portfolio into emerging markets.
The graph below indicates what progress has been made by emerging markets in the capital markets. Interestingly, it also shows what proportion of world market cap the emerging markets actually make up. Though undoubtedly a volatile element of any portfolio it is worthy of note that many well balanced portfolios may not allocate fair proportions to emerging markets to reflect their true position. Some may well do, but some will not.
Therefore in order for your investment portfolio to reflect this seismic shift it is important to ensure you have the right proportions invested in the right areas. That’s not to say that you will benefit from an unadulterated love affair with the emerging markets. Again, it goes back to having the right proportions invested in the right areas for asset allocation is the key to any successful investment strategy.