The president of the world's largest money manager, BlackRock Inc , said on Tuesday that emerging markets are a bright spot for investment and warned U.S. real estate prices are likely to fall further.

Financial markets and the economy have become increasingly global over the years, but U.S. investors remain under-invested in emerging markets such as China and India, Robert Kapito told financial advisers gathered for an Investment Management Consultants Association conference in New York.

Most Americans, he said, have 5 percent to 10 percent of their portfolios invested overseas.

That is not enough,' he said.

Kapito, offering advice that financial advisers could pass on to clients, also forecast a global focus would cause investors to diversify away from the U.S. dollar.

Closer to home, he cautioned the U.S. economy still faces many challenges, in particular in the real estate sector.

I don't think we have found the bottom of real estate, he said. I would not tell you it's the time buy real estate.

Kapito said the financial crisis of the past two years would have significant long-term repercussions. One result, he said, was that governments have become the largest buyers of debt and will for years to come have a bigger role in the financial services industry.

The government is going to pay a very, very large role in the future of investing and if you don't see that trend you're missing the big picture, he said.

Many firms have seen the first indications of government intervention with pay restrictions imposed by U.S. pay czar Kenneth Feinberg for firms that accepted U.S. government bailout money.

Firms such as American International Group Inc angered many Americans this year when it paid million-dollar retention bonuses -- payments simply for staying in their jobs -- to executives at a financial products unit responsible for the insurer's financial implosion.

Kapito said the way Wall Street lavishes bonuses on employees is not correct and needs to be changed.

It's a very tough situation. Obviously it has to be tied to the firm's performance, how clients are doing, and how the shareholders are doing. It's a big issue, he said.

Kapito said that, while interest rates would remain low in the near term, they will over the longer term be driven higher as governments around the world boost their own rates, competing to attract investors.

In wide-ranging comments, Kapito also said he expects to see more merger and acquisition activity from companies that have accumulated cash during the downturn.

(Reporting by Clare Baldwin and Joseph A. Giannone; editing by Derek Caney and Andre Grenon)

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