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It’s amazing how in theory we are all well versed with the fact that markets move in cycles, but in reality our actions don’t bear this out. It was not too long ago that Wall Street analysts were high on emerging markets and heavily recommended them to investors in the West.

Well, that love affair did not last long and now American large-cap stocks, as measured by the S&P 500, are being ardently courted. Yet, it would be a mistake to give up on emerging markets just because they were mercilessly hammered this year. Emerging market valuations are more attractive now than that of US stocks. And seriously, not every year is going to look like 2013 for the US stock market.

This is not a “buy emerging markets" story. I am here to tell you why global investing, whether in emerging markets, frontier markets, or even markets of the US and Europe, should be a part of your portfolio decisions. When investors talk about asset allocation and diversification, they instantly think equity and debt and a further break down within these categories.

For instance, within equity, they will attempt to diversify their investments across value and growth, and market capitalization differentiators. Within debt, they will think along the lines of fixed-return products and debt funds. The more sophisticated and wealthier investors will go one step further and also think along the lines of investments such as property, art and antiques.

However, by ignoring global investing when planning for diversification, investors are using only a fraction of the weapons in their investing arsenal.

Geography lessons

It would be wise for an investor, whichever part of the world she is positioned in, to be able to participate in good stocks globally. If your portfolio has a global tilt, you will be able to exploit a business, or an economic or geographical trend in another part of the world.

Benefiting from good stocks across the globe is one aspect of global diversification. The other is benefiting from various geographies. Certain countries in Asia and Africa are at an earlier stage of development than emerging markets countries. Some of them are entering a period of mid- to high-single-digit growth, thanks to favourable demographics, infrastructure spending and an improving business environment.

Omar Negyal, asset manager of JP Morgan Global Emerging Markets Income Trust, recently noted the strength of South African companies. According to him there are excellent companies across a broad swathe of industries with very mature management and boasting of growth opportunities in sub-Saharan Africa. Back in the 1980s, who would have predicted that a Finnish company (Nokia) would end up leading the mobile phone industry a decade later? Or the rise of Korean electronics manufacturers?

There’s no certainty that a particular market performing well presently will continue to do so every year on a regular basis. Remember 2011? Most investors across the world were licking their wounds, specially those in the euro zone. But those who had invested in a fund focused on South America would have benefited from the performance of the Venezuelan stock market.

This year, the US stock market has been on fire. But will it continue to do so, is a million dollar question.

At the core

Just two points. First, no one market will keep performing year after year. Hence, there is no logic in investing only in a single economy. From risk and return perspective, it makes a lot of sense to diversify your investments geographically. Second, it is not easy for an investor to scout for good companies in other regions. The best way to do this is to invest in a fund that invests in companies across the globe which fit into its theme—such as, gold mining, agri-business or energy. Or, it could be a fund that focuses on a particular region, such as countries in the South Asian Association for Regional Cooperation, or the emerging markets or South America. There are also a couple of country-specific funds that focus on, say, China, US or Brazil.

While doing this, make sure that such focused bets fit in with your overall investment plan.

Go global. It will do your investment portfolio a world of good, literally. And the best way to go about this is to invest in mutual funds.

Aditya Agarwal is managing director, Morningstar India.

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