Julian Knight: The West? It's so old. Best look East for better returns

Most advisers will tell you to limit your exposure to emerging economies, but they're behind the times

(URIEL SINAI / GETTY IMAGES)

It seems like only yesterday but it's nearly 20 years since the Berlin Wall fell. This event prompted the political philosopher Francis Fukuyama (below) to declare the "end of history" and the victory of the West.

But the story of this century hasn't been the further empowerment of the West, but the East – led by China and India – surging ahead while the West sees its economic primacy slipping away.

And, with the credit crunch, the transfer of wealth and power from West to East has gathered pace. President Obama's stimulus package is, after all, funded by the Chinese. History tells us that from the rapid fall of Imperial Spain to Britain's own decline after two ruinous world wars, real power isn't vested in armies or politicians but in debt and in who owns that debt.

This great phenomenon of our lives (power shifts of this magnitude are rare in history) isn't just a case of the greedy and often unproductive West mortgaging its future to an acquiring and focused East, it's also about demographics. Most of the West is getting older, whereas look East and you mostly see young, growing populations. This West is weighed down by in-built inflation, not for goods and services, yet – although that will come as the East demands more for what it alone can produce – but for health and long-term care. On the other side of the coin, a lot of UK companies are simply a pension fund with a business tacked on.

Economists know this wealth transfer from West to East is happening at breakneck speed, as do those involved in international banking and trade – but what about private investors? That's you and me. When I started in financial journalism a decade or so ago I was told by nearly every independent financial adviser that the ideal portfolio for a private investor involved a majority of UK holdings, with less in the US, Japan and Europe, and as little as 5 per cent in the so-called emerging economies – China, India, Brazil and Russia.

Today, despite such a fundamental shift in world power and wealth, IFAs still repeat the same mantra. They argue that investing in emerging countries means you are exposed to high risks from adverse currency moves and greater political instability. In addition, investing in the UK stockmarket gives you access to firms that have global interests able to benefit from the dash for natural resources caused by the expansion of the emerging economies.

But, over the long term, investment returns don't lie. If you had invested £1,000 in the FTSE 10 years ago, you would, on average, be sitting on a loss of around £350. The same money invested in most emerging economies would have given excellent returns. And that's 10 years – a long time in the investment stakes.

What to draw from this? Perhaps the approach to asset allocation of many private investors is wrong and way behind the times. OK, emerging economies can be very volatile and prone to sudden dips in values but, as has been borne out over the past two years, so can the share price of once "rock solid" Western banks. What's more, the fundamentals underpinning many of the emerging economies are far sounder than our own – rising productivity, creation of a consuming middle class and fewer worries over medical and long-term care inflation. Taken in the round, perhaps UK private investors should look East far more, as a hedge against the economic failures and looming demographic and pensions crisis in the West. Perhaps we ought to change the investment language – instead of the West being referred to as "mature" economies, how about "elderly"? As for the East, instead of "emerging", call them "high-growth" economies.

Fukuyama's idea of the victory of the West and "the end of history" is now seen as an anachronism, but many IFAs and private investors still haven't got with the programme. The fact is that the East has risen and if you want returns that's where you must look.