Many Canadians remain overly focused on the domestic stock market and, to a lesser extent, on U.S. financial markets. This means that they are ignoring many of the benefits that greater international exposure and diversification offer. One of the best ways to achieve this is by investing in emerging markets, which offer a wide variety of benefits that enhance returns and reduce overall portfolio volatility. Now what? Firstly, emerging markets are less correlated to major developed markets such as the U.S. and Canada. This means that they do not move in lock step with developed markets and, despite being more…
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Many Canadians remain overly focused on the domestic stock market and, to a lesser extent, on U.S. financial markets. This means that they are ignoring many of the benefits that greater international exposure and diversification offer.
One of the best ways to achieve this is by investing in emerging markets, which offer a wide variety of benefits that enhance returns and reduce overall portfolio volatility.
Firstly, emerging markets are less correlated to major developed markets such as the U.S. and Canada.
This means that they do not move in lock step with developed markets and, despite being more volatile than those markets, this reduces the overall volatility of investment portfolios.
Secondly, by investing in emerging markets, investors can enhance returns.
You see, emerging markets typically grow at a far greater rate than developed markets. This can be partly attributed to technology transfers and foreign investment, but also because of favourable demographics, growing consumption, increasing wealth, considerable room for productivity gains, and relatively low debt.
As a result, their economies and subsequently private enterprises grow at an extraordinarily higher rate.
If we turn to Colombia, where Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) has a considerable presence as the Andean nation’s fifth-largest bank, this is easy to see. For decades the country has been closed off from the world and been locked in violent civil conflict, but since achieving some level of stability by the mid-2000s, its economy has grown rapidly. Over the last 10 years it has grown at an exceptional rate with annual average GDP growth over that period of 4.6%–more than double Canada’s 1.7%.
As a result, businesses operating in Colombia have experienced fantastic rates of growth. Between listing on the NYSE in 1996 and hitting its highest price ever in January 2013, Colombia’s largest bank, Bancolombia S.A., saw its share price more than quadruple.
Finally, emerging markets appear exceptionally cheap at this time.
Many emerging markets have been hit hard by the prolonged slump in commodity prices that has caused their currencies to be significantly devalued and the value of assets to drop.
Even Bank of Nova Scotia, which has considerable international operations focused on Latin America and derives around a third of its net income from emerging markets, has not been unable to escape unscathed. Not only is its share price down 3% over the last year because of concerns regarding its exposure to emerging markets, but ratings agency Moody’s downgraded its debt earlier this year for that very same reason.
Nonetheless, according to one of the world’s largest asset managers, Pacific Investment Management Co., the exodus from emerging markets has created the trade of the decade for the long-term investor.
These are all great reasons for Canadian investors to consider adding emerging markets to their portfolio. One of the easiest ways to gain this exposure without leaving the comfort of Canada is with Bank of Nova Scotia. It has a considerable operating footprint focused on the fast-growing economies of Latin America; it is the fifth-largest bank in Colombia and the third-largest in Peru.
Another option is to invest in either the iShares MSCI Emerging Markets IMI Index ETF (TSX:XEC). This ETF provides investors with broad exposure to 23 emerging markets and 1,500 stocks from around the world; its top five holdings by country in order of weighting are China, South Korea, Taiwan, India and South Africa.
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Fool contributor Matt Smith has no position in any stocks mentioned.