The future of investing does not lie in Europe or the US.
My portfolio has had a pretty fine year, but when I look at the top performers a clear trend emerges. Emerging markets have clattered the competition.
My emerging markets investment trusts have been rampant. BlackRock Latin American investment trust is up 147% in the last 12 months, First State's Scottish Oriental Smaller Companies is up 99%, and Baring Emerging Europe has soared 83%, according to Trustnet.com. During the same period, the average UK All Companies fund grew 40%.
Peru rules the world
This isn't a fluke, as a quick look at the MSCI world indices will confirm. Over 12 months, China is up 77%, India 89%, Indonesia 97%, Brazil 110% and Peru (Peru!) 140%. In emerging Europe, Turkey and Russia are both up around 90%, and Hungary 80%.
The worst performing index across Asia, Latin America and Eastern Europe was Poland, and that still grew 22%. Aside from the Czech Republic, virtually every other country grew at least 40%.
Almost every emerging country thrashed the UK, which grew just 23%, while the US delivered a pasty 18%, according to MSCI.
That looks pretty clear cut to me. So where do you have most of your money?
What's wrong with volatile?
So what, you're thinking. Everybody knows emerging markets are having a fine old time these days. And you've already got exposure, haven't you? Of course you have. But have you got enough?
Now everybody will tell you that if you invest in emerging markets, you have to accept extra volatility, and they're right. They have certainly been more volatile this year, but in a good way.
BlackRock Latin American is on a high volatility ratio of 40 over three years. Baring Emerging Europe is at 39 and Scottish Oriental Smaller Companies is at just 30.
Compare that to Liontrust First Growth, which invests in solid UK blue-chips such as Royal Dutch Shell (LSE: RDSB), GlaxoSmithKline (LSE: GSK), AstraZeneca (LSE: AZN), BG Group (LSE: BG), Unilever (LSE: ULVR) and British American Tobacco (LSE: BATS) and has a much lower volatility ratio of just 22 over three years.
So you can see that investors overseas are taking more turbulence on board. But given recent returns, that is the kind of volatility I can live with.
Brits are volatile too
And it's not as if the UK and US are islets of serenity. They shed the almost half their value in the crunch, and haven't bounced back in such a spectacular fashion.
Over five years, emerging economies have outperformed their developed rivals. Eastern Europe is up 10%, the Far East 12% and Latin America 27%, compared to around 0% for the US and UK. The pattern is similar over 10 years.
Going great guns
For years, advisers have had a very clear view about the role of emerging markets in investors' portfolios. They are high-risk, high-return, a little whizz-bang to match the heavy artillery of the FTSE 100, and shouldn't take up more than 5% to 10% of your portfolio.
I've always stuck to that, but recently I've started to push my exposure to around 15% to 20%. Perhaps it's because I've read so many articles about the credit crunch strengthening the growing global shift in power from east to west. I even wrote a few of them, on 1 billion reasons to invest in India, China's Great Wall of Worry and Are you brave enough to invest in Brazil?.
Or it may be that I've read even more articles about the parlous state of the UK economy, and the ponderous progress of its recovery.
Unsound as a pound
One drawback is that overseas shopping expeditions are an expensive business these days, given the ailing pound. Furthermore, if the pound does ultimately rebound, the value of your overseas assets will weaken. So that is a good argument against getting too carried away.
If that worries you, you can invest in global markets without even leaving home, or rather, your home currency.
The biggest British companies are those that have roamed far and wide beyond the gloomy, broken UK. The Fool's very own David Kuo will tell you, as he told Roger Bootle, that it's not impossible that the FTSE 100 could hit 7,000 next year precisely because major names such as Barclays (LSE: BARC), GlaxoSmithKline, AstraZeneca and Royal Dutch Shell are international companies that have tapped into the global recovery.
The long game
I'm seriously rethinking about my emerging markets exposure. If you're still feeling bullish, and I am (at least I am today, tomorrow who knows…), you would have to back them to outperform developed markets, possibly for many years to come.
Although if you think it's time to be defensive again, you might prefer to stay closer to home.
Just don't think the UK isn't volatile -- it clearly is. True, emerging markets are even more volatile, but as I'm investing for at least another 20 years, it is the kind of volatility I like.
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