Despite their strong recent performance, Standard & Poor's equity strategists continue to favor stocks in emerging markets. After rising 31% in 2005 in U.S. dollar terms, the MSCI Emerging Markets Index is up 21% year to date, making it the best-performing major equity region in the world in 2006.
Given the magnitude of recent gains, we would take a tactical, dollar cost averaging approach with new positions. In addition, given the inherently higher volatility of this asset class, we recommend a diversified, as opposed to country-specific, approach.
Although emerging market equity indexes comprise only 7% of global equity market capitalization, their economies are growing rapidly and, in our view, warrant an allocation within the international equity portion of U.S. investor portfolios.
In addition, S&P believes emerging-market equities offer greater portfolio diversification than more developed international markets, as they're much less highly correlated to U.S. equity market returns than the European and Japanese markets.
Which emerging markets have moved to the forefront? Here are the nine biggest, which together comprise 82% of the MSCI Emerging Markets Index market capitalization: