Emerging Markets: A 50% Allocation is the New Neutral
Interesting claim in a recent II article about emerging markets: You should be allocating half of your portfolio to such markets based on their real share of global economies.
Emerging markets constitute 13 percent of the MSCI all country world index, so by that measure, most Western institutional investors are indeed underweight. But some analysts regard the MSCI weighting as excessively low. The index firm bases its weightings on the free float of shares in a given market; many emerging-markets companies have only a modest percentage of their shares in public hands, with the bulk still held by controlling families or governments. “Why should the somewhat arbitrary and fairly static rules of an index provider define useful investment allocations?” asks Ashmore’s Booth. He contends that investors should have a 50 percent exposure, which equals the emerging markets’ share of global economic output based on purchasing-power parity. “That’s if they’re neutral, not bullish,” he says.
Of course if emerging markets deserve that sort of weighting then they are hardly emerging anymore. And that makes frontier markets – equatorial Africa, Vietnam, etc. -- the new emerging markets, a thesis I largely agree with.
