Can investors make a mint on the Mints?
Weigh the risks before putting money into Mexico, Indonesia, Nigeria and Turkey
Sunday 08 May 2011
Once Brics were the hottest way to build up a successful investment portfolio, but now private investors are being urged to suck on a Mint for a taste of overseas markets.
The impressive economic performance of Brazil, Russia, India and China has meant that anyone investing in them 10 years ago would have made decent returns. Now analysts at the fund manager Fidelity International say serious long-term investors should spread their net further into the likes of Mexico, Indonesia, Nigeria and Turkey. The markets across these countries have risen 117 per cent since 2002, compared with a 47 per cent rise across Europe.
But before you rush out to buy your stocks, Tom Stevenson, the investment director at Fidelity, cautions: "For all emerging markets, investors need to consider the associated risk factors. Recent instability in the Middle East and North Africa has highlighted the higher susceptibility to political risk, in particular. The task, therefore, is to find those countries and assets that offer sufficiently high returns that adequately compensate for the level of risk being taken."
And the risks can be huge, with some emerging market investments plunging 60 per cent in recent years. "Investors need to know they have the stomach for such losses," says Liam Shiels, a financial planner at the wealth-management firm KMD. "Even for an aggressive investor, we recommend only about 8 per cent of a portfolio should be in specific emerging market funds. The lure of short-term gains is not investing, it's speculating."
The in-depth knowledge needed on countries not necessarily known for corporate transparency may be the biggest hurdle for private investors. Extensive research is needed, for which most will have neither the means nor inclination, according to Meena Lakshmanan, of Vestra Wealth. "The GDP of a country does not necessarily reflect the stock market. Based on GDP, China is the second-largest economy, but the quality of its companies is not necessarily that high. This is why a fund is a better buy than a single stock from a country where corporate governance, accounting cycles and regulatory issues are all different from those in developed markets."
Mr Shiels favours using index funds, such as the Dimensional Emerging Markets Core, as they offer the same advantages whether focused on developed or emerging countries. "You will get access to companies that will go to the moon to compensate for those that don't," he says.
One way to gain exposure is through an emerging markets fund or investment trust. There are several dozen to choose from, as well as more specialist regional funds, such as Latin American funds, or single-country funds, such as those investing in China or India. There are also Exchange Traded Funds which allow investors to access countries' equity markets with a single fund. Like a mutual, ETFs are based on a basket of stocks giving a level diversity that can help mitigate risk. But, unlike a mutual fund, they can be traded on an exchange. They also have relatively low costs and a beneficial tax status.
One fund that uses ETFs to access both emerging and "frontier" markets is the Ignis International Emerging Markets Select Value Fund, which is actively managed by James Smith. He invests, in the main, in countries rather than stocks, according to the value of their markets, buying when they are at the cheapest and with the flexibility to move quickly as prices rise and the country becomes "toppy". Mr Smith says this helps mitigate risk as he is buying into the cheapest markets, waiting for the high-flyers to correct downwards, while his "plodders" are rising. Countries are ranked according to capital, growth, earnings, but also by more subjective issues such as social stability. "My team have found that the majority of the variance in emerging market stock prices can be attributed to overall market conditions, and in particular how the market perceives the country," says Mr Smith.
Currency is another option. "We like some of the emerging currencies," says Philip Poole, of HSBC Global Asset Management. "We expect them to appreciate against currencies of the developed world, including sterling. Fixed income markets through debt funds get a much higher yield as interest rates are so low in the developed markets."
The advantage of debt funds is that they tend to be less risky, and the invested capital is protected. But, as always, less risk can mean smaller gains.
Low-risk investors can dip a toe in emerging markets from home. The FTSE 100 is top heavy with firms which draw most of their profits from abroad. BP, the big banks and most of the world's oil and mining companies are listed in London, and with the promise of commodities giant Glencore joining this year, exposure to new markets is huge. Only last week, Diageo announced strong sales, thanks to a buoyant market for its whisky and gin in regions such as Asia, Latin America and Africa, which offset a weakened Europe.
But for those who can take the threat of loss on the chin, Fidelity's Mr Stevenson has a few words of hope: "Finding the next group of countries that can compare with Brics in terms of scale is a virtually impossible task, but Mints may just have the potential to be as rewarding for investors over the next 10 years as Brics have been in the past 10."
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