By Tom Bradley

China, India and the other emerging economies will grow considerably faster than the developed world over the next ten years. That statement appears to be as close to an economic certainty as anything we can say today.

Does it follow then that any reasonable investment strategy should be heavily stacked towards securities from these countries? Presumably, they will grow faster and deliver better returns to their shareholders over the long run.

The answer is yes, portfolios should have meaningful exposure to emerging markets. Should they be heavily stacked? Read on.

Emerging market stocks are a great example of where the price paid has to match up with the potential. In the past couple of decades, there’s been money to be made, but investors’ timing and skittishness has resulted in disappointing returns.

In his latest letter, Howard Marks, the Chairman of Oaktree Capital Management, addresses this point.

“I don’t mean in the least to suggest that the outlook for China, India and the rest of the emerging markets is less than bright. In fact, I’m sure they’ll out-grow the developed world over the remainder of the century. The problem, however, is that simplistic, mania-following investors elevated emerging markets to the pedestal of the “sure thing” where nothing can go wrong. And when prices incorporate unlimited virtue, the eventual result is bound to be disappointment, disillusionment and depreciation. Even favourable developments can lead to losses when they fail to measure up to expectations. That’s been the case in the emerging markets.”

Staying with Mr. Marks for a moment, it seems appropriate to bring out one of his well-traveled quotes.

“No asset can be considered a good idea (or a bad idea) without reference to its price.”

In the Steadyhand equity funds, we’ve been gradually increasing our exposure to emerging markets over the last year. It’s come in two forms – directly in companies located in the emerging market countries and indirectly through western-based firms that have meaningful and growing emerging market revenues. Stocks we’ve bought or added to include Unilever (Netherlands), Asia Pacific Breweries (Singapore), China Mobile (China), Dongfeng Motor Corp. (China), HSBC (UK), Samsung Electronics (Korea), Mead Johnson (U.S.), Dairy Farm International (Hong Kong), Bridgestone (Japan), SK Telecom (Korea) and Singapore Telecommunications (Singapore).

All of our managers are aware of the potential that emerging markets offer. They are looking for the best vehicles to tap into that potential and are carefully considering the price.