The Jonathan Davis Column: Emerge from the global gloom

As Professor Malkiel points out: `The emerging markets road to riches is not for the faint hearted'

THE SECRET of successful investment, as has often been observed, lies in avoiding doing what everyone else is doing: by definition if you do the same as everyone else, you will end up with a mediocre result.

This is sound advice in theory, but awfully difficult to follow in practice. As Keynes perceptively observed more than 50 years ago, many people would prefer to fail conventionally rather than succeed by doing something out of the ordinary.

Granted the importance of having a contrarian streak, is the place to be investing now in emerging markets? A quick scan through the statistics tells a painful story of decline over the past year. A glance at the share price history of Templeton Emerging Markets, oldest and largest of the specialist investment trusts in this area, shows what a volatile ride this particular sector has been over the last 12 years.

Despite the flight to quality by investors all over the world in recent months, one man who thinks that emerging markets are the place to go hunting for bargains these days is Professor Burton Malkiel of Princeton University in the United States. As anyone who has read his classic book, A Random Walk Down Wall Street, will know, Professor Malkiel has done as much as anyone in the last 20 years to demystify stock market investment.

He is a distinguished academic who - unlike many of that breed - has not been afraid to put his money where his mouth is. Although a firm believer in efficient markets, and hence one of the earliest advocates of the merits of index funds, he was also one of the first to predict that the Eighties would be the start of a major boom period.

Now, like many other commentators, Prof Malkiel is wary of current valuation levels on Wall Street and in other major equity markets. But, as I discovered when I caught up with him the other day, he is positively gushing about the potential for emerging markets.

Emerging market funds now offer "the best bargains anywhere in the world", he says confidently. "In five to 10 years time, people will look back and say `boy, when those bargains were there, why didn't we do something about it?'."

A year ago, Prof Malkiel was putting the finishing touches to a new book, Global Bargain Hunting, written with a colleague at New York University, which made the case for buying shares in emerging markets even then. That, of course, was before the dramas of the past year which have sent most markets in Asia crashing and precipitated Alan Greenspan into what looks like mildly desperate measures to prevent the world succumbing to "the worst financial crisis since the War".

Prof Malkiel makes no bones about the fact that the current crisis has badly damaged investors' confidence in the emerging market concept. But his view is that the recent turbulence is merely a demonstration of the fact that the risks in emerging markets are - and always have been - high. These risks are the flip side of the equally high potential rewards to be earned from investing in what have been some of the fastest growing and vigorous economies in the world. "This road to riches," he writes in his book, "is not for the fainthearted."

The basic arguments for emerging markets have always been that they enjoy higher growth rates and lower market valuations than our own markets. But a crucial third element in the case has always been that they tend not to move up and down in line with the big markets in the USA and Europe. As a result, they offer powerful diversification benefits to anyone with a high degree of stock market exposure.

Even this hardened optimist, it is true, does harbour some doubts about the case for emerging markets. Malaysia's decision to reimpose capital controls is "a worrying development" which, if echoed elsewhere, could undermine the attractions of emerging markets for investors. His book chronicles in detail the threat posed by the lack of enforceable legal constraints on managements and governments in many emerging market countries.

The bottom line, however, says Prof Malkiel, is that the best response investors can make to the current turbulence in financial markets is to increase rather than reduce their diversification across different types of asset. Emerging markets have an important part to play in that equation.

The current widespread gloom is an unprecedented buying opportunity. "It is the nature of markets to go to extremes. If we weather the storm, the bargains will be better than ever."

News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
news
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebooks
ebookPart of The Independent’s new eBook series The Great Composers
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Sauce Recruitment: Retail Planning Manager - Home Entertainment UK

    salary equal to £40K pro-rata: Sauce Recruitment: Are you available to start a...

    Ashdown Group: Front-End Developer - London - up to £40,000

    £35000 - £40000 per annum: Ashdown Group: Creative Front-End Developer - Claph...

    Recruitment Genius: Product Quality Assurance Technologist - Hardline & Electric

    £18000 - £24000 per annum: Recruitment Genius: The role in this successful eco...

    Ashdown Group: QA Tester - London - £30,000

    £28000 - £30000 per annum: Ashdown Group: QA Tester - London - £30,000 QA Tes...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower