Modern strategies dealing with allocation of portfolios generally include a recommendation of non-United States diversification. When investors discuss buying ETFs or emerging market stocks, they usually concentrate more on prospects of growth and not solely diversification. The principal thought behind this rationale is that the American market provides little growth. It is perceived that US stocks trade at high valuations. Even experts like Warren Buffet now hanker for foreign stock.
Experts, however, agree that most of the growth observed in emerging markets come to the United States. To give an example, wealthy Chinese nationals have discovered techniques to skirt around Chinese Government restrictions on investments made by foreign entities. They illegally bring Yuan to American stock exchanges and into housing markets of North America. It is seen that the successful Chinese invariably parks their money in the West.
There is an excellent reason for this. Productivity gets stagnant in emerging markets. Many countries like Japan have harsh bankruptcy laws. These laws repel the budding entrepreneur from creation of businesses as they get only a single chance. There are other cultural factors as well. These includes the crabs inside a barrel as described by Filipinos. All of these put up the entry barrier to innovative business thinking and its execution.
A majority of the booming Chinese growth is simply the mimicking of American business ideas and then making a monopoly of them in local market. Chinese companies like Baidu and Alibaba are prime examples of this phenomena. They are robust companies but they simply follow behind true innovators like Alphabet and eBay. It makes common sense to bet on US companies rather than foreign ones who follow the latter.
The assumed potential growth is yet to be observed in the emerging markets. This growth moreover overemphasizes gross population and ignores the fact of income inequality. This inequality restricts the abilities of companies to grow their profits in demographies characterized by lower socioeconomics. Imbalance in power also reduces the transparency for any investor to do the due diligence.
Other problems exist as well. The present economy of the world behaves as it is one nation with one currency. This phenomena started during the 1990s when the currency restrictions were removed. The problem is that a single country will have unrestricted freedom of both trade and capital movement- which it in reality does not have.