The reasons for this are compelling, Sovereign portfolio analyst Peter Halligan says.
In the late 1970s the markets of the East Asian region provided dramatic evidence of the rapid evolution possible when countries embrace market principles and provide legal frameworks that foster private enterprises. During this period Hong Kong, Singapore and Taiwan grew rapidly to become successful and affluent.
Beginning in the mid-1980s, Latin America began to shift from dictatorship to democracy, and from state control towards free market principles. Chile was by far the most successful in terms of these reforms.
It was the fall of the Berlin Wall though, in 1989 that has most radically changed the investment horizons for emerging markets investors. Not only did it herald the break up of the Soviet Union and the liberation of Eastern Europe but also, more significantly, it changed the basis of economic debate.
The consequent dismantling of socialist systems, planned economies and state controls has been on a far larger scale than previous liberations.
The so-called 'third wave' extends from Africa through Europe and Central Asia to China and the Pacific Rim. The benefits are only just beginning to become apparent.
Since the Asian crisis investors have 'rediscovered' emerging markets inspired by stable currencies falling risk premiums, the declining cost of capital and strong earnings growth.
Looking forward there is some optimism about improving fundamentals, especially once the cycle of US monetary tightening ends. With recent evidence suggesting a soft landing in the US is likely and signs of growth re-emerging in Europe, conditions look nearly ideal for emerging markets, Halligan says.
As emerging markets become an increasingly important part of the global economy investors need to diversify their portfolios to incorporate this diversity, he says.
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