Emerging Markets Demand Diversification

04/13/2011 Share 0 comments

Diversification is the theme that has emerged since. August 2008. Today investors are diversifying in multiple dimensions: nationally, regionally, industrially and from a sector perspective.

Emerging markets offer the possibility of good returns but there is some risk. Inflationary pressures and the impact of tighter monetary policies in China and India, with their fast growing economies, helped drive global growth over the past few years. The sharp capital inflows that buoyed emerging markets assets in 2010 could also reverse if economies experience a sudden slowdown.

Emerging market returns may prove less robust in the coming months after two years of impressive gains. However emerging markets governments that have enough flexibility to effectively manage inflation are likely to continue expanding at healthy rates, supported by moderate consumer growth. Emerging markets stock valuations also appear to be reasonable on the whole, particularly in light of solid corporate earnings and growth prospects, and managers believe there are myriad investment opportunities.

Portfolio managers and analysts favour technology that is likely to profit from demand for new products as well as telecommunications providers that offer dividends and earnings growth. Consumer companies remain an area of considerable interest, as stocks witnessed sharp share price run-ups last year.

The same group has become more cautious about some financial stocks in a higher interest rate environment and amid the prospect of tighter regulations for banks. They are also cautious about those that face increased competition from larger multinational corporations.

Please find below the table of major emerging market diversified ETFs

In terms five years returns VWO & EEM are the best with returns of 10.34% & 9.46% well above the five year benchmark interest rates. The volumes are also large indicating high levels of liquidity. In term of 1 year returns DEM again VWO are top with returns of 21.48% & 18.24%.

VWO employs an indexing approach to provide broad exposure to the equity markets of emerging countries mainly Europe, Asia, Africa and Latin America. The median market capitalization is of $ 18 billion. The expense ratio is 0.22% as of 25/02/2011. Please find attached the top ten largest holding as on 28/02/2011. (These holding comprise of 19% of the net assets of the fund.)

1.        Petroleo Brasileiro SA

2.        Vale SA

3.        Samsung Electronics Co Ltd.

4.        Gazprom OAO

5.        Taiwan Semiconductor Manufacturing Co Ltd.

6.        China Mobile Ltd

7.        America Movil SAB de CV

8.        Itau Unibanco Holding SA

9.        Industrial & Commercial Bank of China

10.    China Construction Bank Corp

Diversification is always a good strategy but before diversifying we have to consider the risk factors. Investing in Emerging markets can be subject to currency risk in exchange rate and restrictions on the movement of foreign currency. In addition, there may be less governmental supervision and regulations and political instability.

Despite this, emerging market equities from an important part of a portfolio. Regional diversification provides a hedge against volatility in the USA and other developed markets. This helps with our objective to maximise returns on portfolio while minimizing risk.

Disclaimer:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols: DEM, VWO, PXH, PIE, SCHE, EEM

(NYSE: DEM), (NYSE: VWO), (NYSE: PXH), (NYSE: PIE), (NYSE: SCHE), (NYSE: EEM)