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The case for emerging markets

Good prospects for emerging markets don't mean that you should plunge in
The case for emerging markets

A recent survey by asset manager Franklin Templeton found that despite 93 per cent of respondents using products made in emerging markets, only 11 per cent of them invested in them. The Foreign To Familiar report found that this is partly because of a lack of familiarity with and some misconceptions about these markets.

Franklin Templeton, which runs a number of emerging markets funds including Templeton Emerging Markets Investment Trust (TEM), also argues that people are missing out on potential investment returns by eschewing this part of equity markets. And there is a very strong investment case for emerging markets, in particular for growth, the arguments for which you can read about in our articles.

But investors need to factor in emerging markets' risk and volatility. So you should not invest in them if you have a short investment timescale and or a low-risk appetite. You should not invest in any equity investment if you cannot hold it for at least five years and, with emerging markets, preferably longer. This kind of asset needs time to grow and you should avoid drawing from investments when they have fallen in value.

Emerging markets could, for example, be held during the accumulation stages of pension and retirement savings funds until a few years before you start drawing from them. And if you're going to keep your pot invested for income drawdown rather than buying an annuity, a portion of it could remain in this high growth area.

Emerging markets could also be held in a junior individual savings account (Jisa) until the child is age 13 – or older if they are not going draw from it the moment they reach age 18.

Darius McDermott, managing director of broker Chelsea Financial Services, adds: “Higher-risk income investors could consider a small allocation as there are some attractive dividends on offer that can help diversify income streams.”

Emerging markets equities should be held as just one part of a well diversified portfolio. Advisers and wealth managers generally suggest having a single digit percentage of your overall investment portfolio in them. McDermott, for example, says that they could account for 5 to 10 per cent. But he adds: “If you are looking to the growth of Asia in particular, then maybe up to 25 per cent.”

Which raises a complication – potential overlap with Asia ex-Japan funds. These are likely to have large allocations to India and China so may hold some of the same stocks as global emerging markets funds.

“Asia is now such a dominant presence in emerging markets, in many ways it makes [sense] to consider your exposure to Asia ex-Japan and global emerging markets funds as part of the same stack,” says Jason Hollands, managing director of investment platform Bestinvest. “But there are some differences: for example, many Asia ex-Japan funds include exposure to Australia and Singapore – developed markets.”

So Hollands says that the following allocations could be indicative of possible allocations to emerging markets and Asia. But he adds: “These aren’t tactical calls, just an idea of a starting point which assumes that the portfolio includes other asset classes. But there clearly will be variations around this depending on the current outlook and your personal risk appetite.”

 

Type of fundPossible exposure for different types of investor (%)
 CautiousBalancedGrowthAdventurousAggressive
Asia ex Japan2.53.544.56
Global emerging markets22334
Total4.55.577.510
Source: Jason Hollands, Bestinvest