I am currently visiting my wife's family in Jakarta, Indonesia.  Jakarta is a fascinating country with great diversity across all areas of society.  Even though the Australia government does not recommend visiting Indonesia due to security concerns, it is well worth a look and quite safe from my perspective.

Being in Jakarta has reminded me of the Emerging Markets phenomenon (Indonesia is generally accepted as one of these markets.)  The term is used to describe business and investment activity in industrialising or emerging regions of the world.  From an economics perspective, these economies are said to be in a transitional phase between developing and developed status.  They are countries that have begun to open up their economies to the world.  The classification of emerging markets is not an exact science and as such there is not a definitive list of countries included in this definition.  However, to put some names to these economies, the top 4 markets are generally referred to as the BRIC economies - Brazil, Russia, India and China.  If you have had any exposure to the international financial media you would quickly identify that these are some of the fastest growing economies in the world - 2006 growth results quoted by the International Monetary Fund saw all four with strong performances - Brazil (3.7%), Russia (6.7%), India (9.2%), China (10.7%).  (Indonesia saw 5.5% growth.)  Stock market returns reflected these conditions.  MSCI Indexes saw the following returns in local currency terms - Brazil (28.46%), Russia (52.11%), India (46.47%), and China (78.67%) all experiencing strong growth.  (Indonesia saw 55.02% growth.)

In comparison, returns in Australia (18.28%) and the US (13.18%) were more modest.

The same MSCI indexes place returns so far this year to 31st May: (in terms of the local currency)

You would have to admit that the recent results are pretty impressive.

However, as with all major investment markets, to capture these returns there is a trade-off between risk and return.  The greater the risk, the greater the expected return.  Emerging Markets are no different and have experienced significant downturns.  Consider the Asian and South American monetary crisis in the late 1990s and early 2000s.  These economies also have some regulatory issues that need to be considered before investing, for instance the strict monetary and political controls in China and regulatory issues in Russia.

So what is our stance on investing in Emerging Markets?

We invest in Emerging Markets to provide an extra risk premium for our investors.  Investing in Emerging Markets also provides an extra level of diversification with our investment portfolios to smooth out volatility.  We invest in these markets by using an index style approach.  Not picking winners (or losers) but holding a wide spread of investments across emerging markets.  This keeps the cost of investing low.  Our preferred fund, Dimensional Emerging Markets Trust, holds shares in companies listed in Argentina, Brazil, Chile, Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey.  (You will note that it does not hold assets in China or Russia mainly due to the regulatory controls in place in those countries.)  In a standard portfolio, an investor would have an exposure of about 5.5% of their growth assets in emerging markets.

I encourage you to have a closer look at investing in Emerging Markets.  To find out more about our investment philosophy please have a look at our web page on Building Portfolios.