International landscape:

The global economy continues to benefit from a low-inflation environment. Developing economies are growing faster than their developed counterparts. And emerging markets are reaping the rewards of sounder fundamentals, such as more disciplined government budgets and ballooning trade surpluses. China reported stronger-than-expected economic growth in the second quarter of 2007 (+11.9%). This, along with a 4.4% jump in prices in the first quarter of 2007, supports our expectations for the Chinese to allow more appreciation of the yuan (which suppresses inflation) and tighten monetary policy further in coming months (on top of the rate hike just announced). Yet the core rate of inflation was a muted 0.9%, calming concerns that China is in the throes of a boom/bust cycle.

One of the biggest concerns regarding China (and the global economy) continues to be a growing protectionist attitude around the globe. The record $26.9 billion Chinese trade surplus in June 2007 likely won't help matters. And the recent tit-for-tat on food and product safety issues only exacerbates the issue.

How much emerging market exposure should you have in your portfolio? We advocate diversified and limited exposure—for example, no more than 5% to 7% of your total portfolio. Emerging market nations have undergone strong fundamental improvements. The continued liquidity supply appears to be finding its way into commodities, buttressing prices that are already elevated by strong demand. This might further support commodity-rich countries such as Brazil and Russia.

However, there are likely to be more growing pains as emerging economies integrate into the global economy. Many valuation measures reflect the possibility that the markets have priced in a sustained rosy scenario. History shows us that periodic setbacks are not surprising. By keeping your emerging market exposure limited, you can accomplish the dual goals of diversifying your portfolio and participating in growing economies.

Views may change as economic and market conditions warrant.