As the investment landscape becomes increasingly global, advisers are likely talking to clients about allocating a larger portion of their portfolios to international securities in general and emerging markets more specifically. Here are a few points you may want to consider when talking to clients about emerging markets:
1. The Shift from Advanced to Emerging Economies
While the media has shed light on the recent cuts in emerging market growth rates, emerging economies will still account for the majority of global economic growth from 2012-2018, according to IMF forecasts. Advisers must not forget, for the sake of their clients, that the emerging markets are still poised for globally competitive rates of growth.
2. Slow Response from Advanced Economy Companies
According to McKinsey & Company, in spite of emerging markets contributing 36% of global GDP, the top 100 companies from advanced economies only generated 17% of their total revenue from emerging markets in 2010. Emerging markets will likely account for over 70% of global GDP growth through 2025. Emerging market companies that ventured in developed markets achieved almost twice as fast growth rates than their advanced counterparts from 1999 to 2008. While operating within their own territory, the growth differential was even stronger, growing more than twice as fast as developed nation companies.
3. Advanced Economy Companies Lack Emerging Market Managers
Having managers that are well versed in the operations of emerging markets at top-level management gives developed nation companies an advantageous perspective. Unfortunately, there are very few executives in large advanced economy companies with strong roots, either having been born or currently residing, in emerging economies. Such managers, are able to help guide developed world multinationals that sometimes struggle to find their footing in developing nations. Factors that contribute to these difficulties include lack of free-trade agreements, not to mention rule of law, unstable political systems, corruption and cultural differences.
4. Emerging Economies are Advancing
Clients, and their advisers, often assume that companies hailing from advanced economies are entirely superior to their developing market counterparts. However, the latter are developing capabilities at lower costs, and similarities between the emerging economies present an opportunity for these low-cost capabilities to spread across the emerging markets.