Emerging Market Investing: Remember Demographics and Take a Selective Approach (ThinkAdvisor)

ThinkAdvisor has a great piece to remind investors about how important demographics are when selecting emerging markets to invest in and how these markets aren’t the same that historically faced boom and bust cycles.

To begin with, aging societies like Japan consume less, grow more slowly and have budgetary constraints tied to their aging population. On the other hand, emerging markets represent the other side of the coin because they usually have younger societies with a much lower old-age dependency ratio.

The ThinkAdvisor article does delve a bit into the history of emerging market boom (often driven by commodities) and bust cycles that were often fueled by immature economic development and governance, the strains associated with the rapid growth, current account deficits, pegged exchange rate regimes, limited foreign currency reserves and a reliance on unstable sources of funding from foreign investors.

However, emerging markets have made substantial progress in recent years while its developed countries that are increasingly grappling with high budget deficits, unstable banking systems and unsustainable public finances.

Nevertheless, ThinkAdvisor made the following conclusions or observations:

Our caution about the near-term outlook informs our conclusions about the need to approach emerging markets in a more selective manner. For much of the history of emerging markets, broad-based rallies and crisis-driven crashes were mostly a top-down phenomenon.  As emerging markets mature, we expect emerging countries to increasingly de-couple from one another, and within countries, we also expect some degree of de-coupling.

And:

Emerging market countries have differing demographics, less synchronized economic cycles and varying levels of political and economic maturity.  Although emerging markets exited the financial crisis in superior fiscal shape than developed markets, some of that “advantage” has been squandered through poor economic or political decisions.

To read the whole article, Rethinking the Role of Emerging Markets Investing in Portfolios, go to the website of ThinkAdvisor.

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