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1. DIVERSIFICATION – Given the unique attributes of emerging markets, there may be a lower correlation between the United States equity markets and as such may provide an opportunity to potentially reduce volatility in one’s portfolio. This reason may very well be the most important of all listed.

2. ECONOMIC GROWTH As mentioned earlier, the growth rate of these various countries can be twice as high as the United States. Growth can be defined by real gross domestic product, which is an inflation adjusted measure that reflects the value of all goods and services produced by an economy each year. In the case of China and India, the two most populous countries in the world, their Real GDP is running at more than double the United States and adds to the potential of increased equity valuations.

3. EQUITY MARKET EXPANSION – According to the International Monetary Fund, emerging markets equities represent a mere 11% of the global equity market, but their economies represent almost half of the total global gross domestic product. This illustrates the disparity between their representation in the investment world versus the economic world and where investors may be misunderstanding the critical importance of these major secular trends.

4. VALUATION We have previously illustrated the growth of emerging markets economies is significantly higher than U.S. GDP growth, but these stocks are also reasonably cheap on various metrics. When using their price/earnings ratio, which compares stock prices with historical earnings, emerging markets are the cheapest in the last 15 years versus U.S. stocks. Emerging markets have been an afterthought given the strong returns of the United States market; however, diversified investors are wise to recognize exposure to cheaper stocks versus expensive stocks as it can be a wise decision for the long-term.

5. CHINA IS VIEWED AS THE EMERGING MARKET. It is true that China is often thought of as the poster child of emerging markets and their growth is recognized in economic circles. But as China’s growth has slowed from the tremendous heights of past decades and new economic challenges present themselves, it is important to recognize that there are many other countries which should be acknowledged for their ascent towards developed market status. Those countries include such populated powerhouses like India, Brazil, Vietnam, South Korea, and one of our large and growing trade partners to the south, Mexico. These countries continue to grow in global economic importance versus China who dominated the emerging market landscape for the past several decades.

The five reasons for emerging markets represent but a handful of explanations that attempt to clarify why this area of the global equity market may be beneficial to investors in a diversified portfolio. Emerging markets may be a small portion of a diversified equity portfolio but an important benefit to you when analyzed properly.

It is easy for investors to project recent experiences of the U.S. market to continue indefinitely and assume international markets are besieged for continued relative underperformance. At Fragasso Financial Advisors, we take a long-term approach to investing that promotes the textbook principles of global asset allocation in creating a path towards your financial goals. That path is best paved with diversification, and at times, can include exposure to emerging markets that offer a wealth of opportunity for your investments.