Portfolios should have 25% allocation to EM, says Goldman Sachs

The world economy will grow faster over the next 10 years compared to the last decade, on the back of the strong consumers demand in emerging markets, according to Katie Koch, managing director in the investment management division at Goldman Sachs Asset Management.

Speaking today in London at the 2012 Morningstar Conference, Koch suggested investors should take a direct investment in growth and emerging markets, which are likely to drive future global growth.

“No European country will be among the top 10 contributors to global growth over the next decade. It is important to have a direct investment in these countries and at the moment access can be only taken with equity investments,” she said.

A positive outlook on emerging markets was shared by a majority of the audience.

Just under 60% of the around 400 delegates at the conference agreed with the view that the world economy is set to grow faster over the next decade.

“Growth markets are key drivers of global growth and valuations are very attractive at the moment. They are at their cheapest quartile in the asset classes’ history,” Koch added.

Goldman Sachs Asset Management recommends a 25% allocation to emerging markets equities, with a similar share of a bond porfolio to be invested in growth and emerging economies.

“This reflects the scale of the opportunity. There is a wealth creation opportunity, but it needs to be weighted. You need to explain to clients that they need to gain exposure to these markets,” Koch said.

In 2011, Goldman Sachs launched the Next 11 fund. The fund, available in the UK, is similar to a BRIC (Brazil, Russia, India, China) fund and it offers exposure to emerging markets economies, despite the strong barriers to investment still imposed in many countries, such as China.

The Next 11 fund is the investment translation of the Next 11 macroeconomic concept, introduced in 2005 by Jim O’Neill, chairman of Goldman Sachs Asset Management and ‘father’ of the BRIC concept.

Next 11 countries are the next regions that will become interesting after the BRICs. South Korea, Mexico, Indonesia, Turkey are among them, Koch added.

She said: “Over the next decade, Turkey will have the same contribution to global GDP as the UK.”

In order to weight growth prospects against political and macroeconomic risks, Goldman Sachs has developed a proprietary growth environment score, which takes into account microenomic environment, macroeconomic stability and political conditions.

According to the score, South Korea is one of the best investment destinations, while Pakistan and Nigeria show a much lower score given high political and macroeconomic risks.

“It’s going to take a long time for these risks to go away, but uncertainty can be where there are opportunities,” Koch said.

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