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."

Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebooks
ebookA delicious collection of 50 meaty main courses
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

    Recruitment Genius: SAGE Bookkeeper & PA to Directors

    £18000 - £24000 per annum: Recruitment Genius: An exciting opportunity has ari...

    Recruitment Genius: Online Sales and Customer Services Executive

    £15000 - £18000 per annum: Recruitment Genius: An On-line Sales & Customer Ser...

    Recruitment Genius: Accounts Assistant - Fixed Term Contract - 6 Months

    £15000 per annum: Recruitment Genius: One of the largest hospitality companies...

    Recruitment Genius: Electricians - Fixed Wire Testing

    £28000 - £32000 per annum: Recruitment Genius: As a result of significant cont...

    Day In a Page

    Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

    Making of a killer

    What motivated a shy student to kill 38 holidaymakers in Tunisia?
    UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

    Just when you thought your commute couldn't get any worse...

    Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
    Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

    The Real Stories of Migrant Britain

    Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
    Cheaper energy on the way, but it's not all sunshine and rainbows

    Cheaper energy on the way, but it's not all sunshine and rainbows

    Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
    Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

    No grace of God for Katy Perry as sisters act to stop her buying convent

    Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
    Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

    Residents just want water and power in a city chosen to be a ‘smart’ metropolis

    The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
    Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

    Something wicked?

    Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
    10 best sun creams for body

    10 best sun creams for body

    Make sure you’re protected from head to toe in the heatwave
    Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

    Nick Bollettieri's Wimbledon files

    Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
    Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

    There is more than a shiny trophy to be won by England’s World Cup women

    The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map