For much of the past three decades, emerging markets were seen as the domain of only the most aggressive, risk-tolerant investors, and even then emerging markets typically garnered no more of an allocation than 2% to 5% of an investor’s portfolio. For many, this view continues unchallenged, although the reality on the ground tells a very different story. Much-needed structural reform in developing economies has made this change possible, and today many emerging markets are actually healthier than their developed-market counterparts.

Emerging markets represent a secular long-term growth opportunity

After the extraordinary run in emerging markets over the past 10 years, it is understandable that some investors are skeptical that the asset class can remain as attractive an investment going forward. But the reality is that the foundation is in place for sustained, long-term growth in the emerging-markets, especially relative to developed markets.

Emerging markets are not facing the significant head winds of high government debt levels, overleveraged consumers, and deflating real estate bubbles that may dampen growth in developed markets for years to come. In emerging market economies, governments and consumers alike are both capable of increasing leverage at a time when the developed world is facing enormous pressure to cut spending.

Demand and production in emerging markets are likely to continue climbing

The fact that emerging markets have taken steps to solidify their monetary and fiscal foundations is not the only quality that makes them worth considering. They also have a burgeoning demand for raw materials, infrastructure, consumer goods, and services. The 10 largest emergingmarket countries are home to well over half the world’s population, but account for only about 30% of the world’s GDP. That imbalance is likely to change — and perhaps sooner than investors think.

For many years, emerging market economies were driven primarily by the inflow of foreign capital. Today, that dynamic is changing. Trade among emerging markets has increased dramatically in recent years, and after years of steadily improving economic conditions and high household savings rates, emerging markets are no longer simply producers, but are now major consumers in the global economy. For the first time ever, in 2008 total consumption in the emerging markets exceeded that of the United States. Increasingly, emerging-market economies are generating adequate internal demand to be self-sufficient, even during periods of decreased economic activity in developed markets.

Emerging markets are well suited to active investment strategies

While there are a number of investment opportunities in emerging markets, they are far from uniform. In such an environment, with a wide dispersion of potential returns, active management driven by intensive fundamental research is key to performance. As active managers, our goal at Putnam is to seek alpha — to generate returns that exceed those of benchmarks but with an eye on risk management. What sets Putnam apart is our size, our position in the market, and the role that collaboration plays across asset classes. Putnam is big enough to have a global footprint in every asset class. Yet we’re nimble enough to capitalize on a range of opportunities, to share information across all our areas of expertise, to challenge our colleagues, and to push one another to outperform. We believe these are the qualities that contribute to a culture of investment excellence.

Read the full whitepaper on the opportunities in emerging markets and Putnam’s approach to investing in the asset class.