Jitters on the world's stock markets last week were particularly acute in "emerging markets", relatively under-developed economies where opportunities can turn into nightmare almost overnight. Ian Morse investigates the opportunities - and pitfalls - in this sector.

"It's easy to buy a turkey in Turkey," jokes Radhika Ajmera, who heads the emerging markets team at Aberdeen Unit Trust Managers.

Her comments relate specifically to Turkish accounting, which does not bother to adjust results to reflect the country's inflation, currently 85 per cent.

But tit is possible to buy a turkey in virtually any emerging market. The funds in this sector are among the riskiest available to private investors. Many of the biggest share collapses on Red Tuesday last week, when the world's markets briefly plummeted like stones, were in emerging economies. Yet emerging markets are touted as holding among the best prospects for long-term growth.

Nancy Curtin, who heads emerging markets at Barings', explains: "Today's emerging markets will hopefully be tomorrow's developed economies. Buying into their assets now should give good prospects of long-term growth, with capital gains."

What is an emerging market economy? The World Bank defines it as one where the per capita gross national product is at or below $9.386 (about pounds 6,200) per annum. That includes countries as diverse as Israel, Poland and Columbia. By comparison, Britain's per capita GNP is just over $20,000 while the USA's stands at $26,000.

But only 25 countries that meet that criterion worldwide attract much investment by fund managers. Ms Ajmera says: "There must be sufficient infrastructure in an economy - a well organised central bank and relative government stability to make outside investment possible." Under those criteria South Africa qualifies, but Zaire has a way to go.

Both fund managers emphasise that from their perspective there are two levels of risk assessment when making judgements about where to invest. Ms Curtin says: "Start from the top downwards, comparing different national economies. Make a selection of best and worst.

"Top down" analysis will hopefully show which countries have "accelerating growth, falling interest rates, no currency surprises and for governments not just to say they have good intentions but prove it in the way they manage their economies."

Thereaafter, analysts go "bottom-up", looking at industry sectors and particular companies operating in them. "I will buy shares in particular companies which show real earnings growth, can finance expansion from their own profits and where management create value for shareholders," Ms Curtin says.

Both Barings and Aberdeen Unit Trust Managers make more than 1,000 company visit each year. "Fundamental research of this kind lets us look behind local accounting procedures," Ms Ajmera points out, "and value shares we buy on the same basis as those in developed economies."

Both agree that for small investors global emerging market funds are less risky than the one-country funds. Ms Curtin says: "We give Russia a 90 per cent risk rating, Portugal only 15 per cent, but the potential for growth in Russia is far higher. A global fund will balance country holdings by these risk ratings against expected growth to optimise returns." Understanding the level of risk involved is crucial: while the Russian stock market rose by 100 per cent in the first six months of this year, on Red Tuesday alone it dropped by 19 per cent.

You can invest into emerging markets through unit trusts, investment trusts and personal pensions.

Both unit and investment trusts are collective investments, but there the similarity ends. Unit trusts are "open ended": new money creates new fund units, with cash raised invested directly into the range of stocks specified by the trust prospectus.

At any time fund managers must invest at least 95 per cent of funds held even if the relevant market is falling or over-priced. If you wish to sell you can do so only back to fund managers, who meet redemptions out of the 5 per cent cash they are allowed to hold, or from selling stocks owned by the trust.

Investment trusts differ from unit trusts in three important ways. Firstly, they issue shares which are traded on the tock exchange like any other. If you want to sell you must find a buyer. Secondly, they can hold far more of their fund in cash. Thirdly, they can borrow on the value of stocks held in the fund.

Because investment trust shares are traded like any other they can be bought at a discount to the assets they hold in their portfolio. But," warns Ms Ajmera, "unlike unit trusts, the price they trade at is a function of demand for these shares, not their real asset value." Each type of trust holds different risks. The best way for a private investor to factor those out is to buy over the medium to long term.

Up to 20 per cent, or pounds 1,500, of the annual general PEP allowance can be used to purchase emerging market funds, but as most growth from these will be capital not income, PEP charges may outweigh tax savings for many.

Emerging market funds can be purchased through personal pensions but the key issue is whether such volatile funds are appropriate.

Best and worst emerging market funds over three years*. pounds 1,000 invested; income reinvested net of tax


Footsie All Share pounds 1,553.19

Unit Trusts

Credit Suisse S. Africa pounds 1,412.86

S&P Korea pounds 513.25

Investment Trusts

John Govett pounds 1,926.18


Fleming Indian pounds 478.22

Personal Pensions

Mercy Emerging Mkts pounds 1,242.39

Scottish Eq. pounds 793.97

Emerging mkts

* 01/09/94 to 01/09/97. Source Micropal.