Beware the siren call of emerging markets
Exciting growth is enticing, but there are pros and cons to investing in the new economies – and it pays to tread carefully.
Sunday 20 March 2011
The story of emerging markets is a seductive one. They are go-get-'em economies, growing at a staggering pace, set to speed past the moribund West in little over a generation. What's more, the main emerging markets of Brazil, Russia, India and China (Bric) have massive populations, growing middle classes and, crucially, young demographics. We all know by now the narrative, and for investors, even usually cautious ones, emerging market fund investment seems the ultimate no-brainer. No wonder the Investment Management Association reports that emerging markets are currently one of the most popular areas for private investment.
But as the deadline for investment in this year's Individual Savings Accounts draws ever closer – investors have until 5 April to put up to £10,200 in an ISA and secure the tax-free status of any growth – there is a note of real caution that needs to be struck. Not all, it seems, is plain sailing in emerging markets and investors should be acutely aware that many of problems blighting the West at present are at play in the emerging economies, potentially putting investment at risk.
Rising inflation is one of the key areas of concern. "Inflation is the price of strong economic growth and the chasing of commodities," said David Kuo, a director of investment information site Fool.co.uk. "China's economy is growing at around 9 per cent – its inflation rate is about 5 per cent; India is growing at about 8 per cent – its inflation is 9 per cent. Provided businesses can raise prices in line with inflation then profit margins and investor returns can be protected."
And inflation may not be a short-term challenge to emerging markets. Commodity price inflation is, according to Phil Poole, HSBC's global head of investment, likely to be the "economic story of the next 10 or 20 years. The effects on personal incomes in emerging market economies are greater as food and fuel take up 60 per cent of everyday spend."
Higher petrol and, in particular, food costs are fuelling political instability in the Middle East and potentially beyond, and this in turn can have a major effect on share values.
Turkey, an emerging market star, has, for instance, seen nearly 20 per cent wiped off its stock market as a consequence of the Arab Spring political instability. Whereas share prices in Western stock markets have, as yet, not been as affected.
"High oil prices will be a big drag on growth in Asia but, in a way, a Bric fund can act as a bit of a long-term hedge against the ill effects of commodity inflation. In Brazil and Russia you have two exporters of commodities, while in India and China you have two consumers," said Mr Poole. "More generally, there is a lot of volatility at present because it seems that one week's headlines reflect on the risks of emerging markets – such as inflation and instability, while another focuses on the rewards – high growth and burgeoning domestic consumption."
Jeff Chowdhry, F&C's head of emerging equities, says it is wrong to look at the dire headlines for the Middle East and inflation as purely emerging-market issues: "The situation in Bahrain, for instance, is worrying because of the Saudi Arabian involvement and the importance of Saudi Arabia as an oil producer. However, this is a risk for all markets."
But Mr Kuo highlights other areas where emerging markets may not come up to scratch: "For a start, corporate governance, which may not be of the same standards that we expect in the West. Closely related is accounting practices and transparency. There is also currency risk, which should not be underestimated. Vietnam devalued its currency by 8.5 per cent this month. So assets denominated in dongs would be worth 8.5 per cent less."
What's more, although growth rates can be exciting, this doesn't always feed through to share prices, and firms may not be used to paying dividends. "It's interesting that China and India have seen rapid economic growth over the past 10 years but returns for shareholders have been similar to those in developed Western markets," said Mr Poole.
However, the ultimate lure of emerging markets may well be that they aren't Western, burdened by debt and set for interest-rate rises: "In the next 12 months, people will be more worried about developed markets because of the need for interest rates to go up from their current historic lows." Mr Chowdhry said. "The emerging markets have started monetary tightening and will be in a better position as a result. In our view, people should be looking to switch from developed markets back to emerging markets."
Independent Partners: See how much you could save by switching credit cards. Compare now
peopleContenders for Time magazine's Person of the Year are a mixture of the good, the bad and the holy
tvSteven Moffat reveals the actor was dying to take on the role of the Time Lord and says he is excited to see what he will do with the character
sportBayern Munich 2 Manchester City 3: City come from two down to beat reigning European Champions
newsAs the world remembers Mandela the hero, the prison where he spent 27 years seems all the more brutal
arts + ents... and a chance to paint Booker Prize winning author Hilary Mantel
danceUnder Tamara Rojo's inspired direction, it seems possible that it could challenge the dominance of the Royal Ballet. We meet some established names and rising stars
travelDiscover Uruguay's jet-set beach resort, an Atlantic enclave with plenty of art and culture to explore on the side
- 1 Mountain goats' miraculous escape from avalanche captured in dramatic video footage
- 2 It’s shameful that our universities have accepted gender segregation under pressure from the most oppressive religious fanatics
- 3 Sir Ian McKellen hits back at Damian Lewis' 'fruity actor' claims
- 4 Kenyan politician Mike Sonko left red-faced after photoshopping himself next to Nelson Mandela
- 5 Selfie at funeral: Cameron squeezes in on Obama snap at Mandela memorial
- < Previous
- Next >
iJobs Money & Business
£45000 - £70000 per annum + Bonus + Benefits: Harrington Starr: Technical Impl...
£65000 - £90000 per annum + Bonus + Benefits: Harrington Starr: Rogue Trading ...
£35000 - £45000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...
£40000 - £50000 per annum + benefits + bonus: Harrington Starr: Data Analyst -...
Day In a Page
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.
A six-bedroom detached period property with secluded gardens, ample parking and a double garage in Rye, £675,000.
A large split-level property with three double-bedrooms and roof terrace, close to Crouch End Broadway, £625,000.
A charming barn conversion in the picturesque Cotswold village of Ilmington with three bedrooms, a detached garage, workshop and beautifully manicured gardens £675,000.
A three-bedroom new build, ground-floor flat with two bathrooms, close to Bermondsey tube, £445,000.
A three-bedroom house in an enviable new development moments from Oxshott High Street, with secluded garden and decked area, £385,000