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Emerging Markets small caps - growing up fast

The Emerging View

06 February 2014

Emerging Markets equities have matured as an asset class. Once-controversial arguments for investing in Emerging Markets (EM) are now widely accepted and most large institutional portfolios have a dedicated strategic exposure. As a group, emerging economies are growing faster than developed economies and will continue to do so for the foreseeable future. Starting from a lower income base helps, and favourable demographics, rapid urbanisation, and large populations of ready workers and consumers are key drivers (see figure 1). This backdrop provides fertile ground for existing companies and new market entrants to grow earnings quickly. At the same time, the reluctance of global investors to delve too deeply into the weeds when putting money to work there leaves occasional pockets of value. For asset allocators, EM equities provide diversification and, in return for modestly higher volatility, have delivered on the promise of higher returns.

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