Emerging into profit or loss? Opinions are split about prospects for Brazil, China and India
Saturday 16 June 2012
No one can argue that the emerging economies have been the best place to invest over the past decade, with those companies exposed to the region enjoying bumper profits on the back of rapid urbanisation as well as economic expansion.
A look at the statistics illustrate the point, with average funds in both the IMA China/Greater China and IMA Global Emerging Markets sectors delivering 202.15 per cent and 191.43 per cent respectively, according to Morningstar data for the 10 years to 4 June 2012.
These are particularly impressive when you consider that the average fund in the IMA UK All Companies sector is only up by a modest 51.65 per cent, while IMA North America has risen by a miserly 27.61 per cent and IMA Japan enjoyed a meagre uplift of 2.21 per cent.
Some emerging market-related funds have done substantially better than the pack. Aberdeen Emerging Markets, for example, has returned 354.61 per cent, while First State Global Emerging Markets and Baring Hong Kong China are both up by more than 280 per cent.
There are several reasons why such funds have performed so well over the past decade, according to Andrew Merricks, head of investments at Skerritt Consultants, one being exposure to countries that have the natural resources needed by the rest of the world.
"The income received from selling these commodities has seeped out into the rest of the region and has helped it develop," he explained.
"In addition, these emerging economies haven't struggled with the same debt problems that have affected the more developed nations."
But the question is whether these regions are still worthy of investors' attention and money. Are the growth rates sustainable or is it better to start putting money into Western economies in the hope they will recover strongly?
It's a point that's dividing fund managers and independent financial advisers.
What is the idea behind investing in emerging markets?
The idea is to invest in companies, markets and regions which are growing rapidly in the hope of making higher returns than would be possible by putting money into the more developed areas of the world.
This exposure can be by investing into a country-specific fund – such as one focusing on China – or through a global emerging markets fund that will have a broader, more diversified remit and invest across a number of regions and marketplaces.
However, by their very nature these investments will be in relatively unpredictable companies and countries, so the potential for losing money will also be considerably higher – as people have found out who have been burnt in the past by crises in Latin America and Asia.
The arguments in favour of investing now
Despite the risks, Geoff Penrice, an independent financial adviser with Honister Partners, is convinced that emerging markets remain the best, long-term growth story.
He sees the main positive for investors having exposure as the potential to enjoy higher returns.
"There is no doubt that future, global economic growth will be driven by emerging economies," he said.
"In the developed economies of the UK, Europe and Japan, we will see long-term growth rates of 2 to 3 per cent, whereas in developing economies, such as China, India, and Brazil, we expect 7 to 9 per cent."
Hugh Young, managing director of Aberdeen Asset Management Asia and manager of Aberdeen New Dawn Investment Trust, pointed out that the International Monetary Fund estimates Asia's economy will be larger than that of the United States and European Union combined by 2030.
"The region may face short-term challenges such as the euro crisis and the transition from export-led economies to ones promoting domestic consumption," he said.
"Over the longer term, we remain optimistic about Asia's prospects, which are undiminished despite these concerns.
Studies back up this stance. Although China's economic performance over the last three decades has been impressive – with annual growth averaging 10 per cent and more than 500 million people lifted out of poverty – it's a trend that's likely to continue, according to the World Bank's China: 2030 report.
"Even if growth moderates, China is likely to become a high-income economy and the world's largest economy before 2030, notwithstanding the fact that its per capita income would still be a fraction of the average in advanced economies," it states.
The arguments against investing now
Robin McDonald and Marcus Brookes, the co-heads of Cazenove's multimanager operations, have their reservations about putting money into emerging markets.
While acknowledging the fantastic returns generated by these regions, they believe investors need to be very cautious about investing any further cash.
"We are recommending investors be more cautious because the next decade is likely to be different in terms of winners and losers," said Mr McDonald. "When this massive change takes place – and we suggest it has already started – ructions are likely to be felt across stock markets and the global economy."
The two managers are keen to draw people's attention to the fact that they shouldn't necessarily be looking to position their portfolios on the basis of extrapolating what has happened in the past.
"It's time for investors to reappraise their very strongly held beliefs about emerging markets," added Mr Brookes. "They need to take a step back, double-check the facts, and test their portfolios for something they believe shouldn't happen – the US dollar getting stronger and China weakness."
That's not to say developing economies are going to grow at a slower rate than the West, but that there are significant risks to the whole story.
"The fact is that most growth over the last decade has been from emerging markets and all expectations for future growth are centred on them," said Mr McDonald.
"As a result, not only are there huge risks to these growth stories but you also pay a very high price to participate in them."
So where does this leave the average investor?
Emerging-market economies are much healthier than their Western counterparts and have the potential to perform well due to rising demand for goods and services from domestic consumers, according to Patrick Connolly at AWD Chase de Vere.
"Emerging-market funds would have once been considered too high risk for many investors, but that's no longer the case," he said.
"As emerging-market equities have become a mainstream asset class, all except the most cautious investors – who should stick with cash or just a small exposure to risk assets – should have part of their portfolio invested in emerging markets."
However, potential investors should still be aware that investing in these regions remains very high risk with performances likely to be extremely volatile.
As a result they would be well advised to only have a relatively small proportion of their assets invested in such areas.
"The amount you should invest in emerging markets depends on your financial objectives, circumstances and attitude to risk," he said. "Typically, an investor should hold between five and 10 per cent, though the most aggressive investors could hold up to 20 per cent."
They also need investment horizons of at least five to 10 years, said Darius McDermott, managing director of Chelsea Financial Services.
"If investors can see through the volatility then they could get handsome returns, but these are not areas for low-risk investors," he said. "You need to be looking at the medium to long term because some of the potential in emerging markets will take a while to come through given the macro background in the developed areas of the world."
How to get exposure
AWD Chase de Vere prefers to get access to broad-based emerging markets funds from established managers such as JPM Emerging Markets, First State Global Emerging Market Leaders and Schroder Global Emerging Markets
"Another way to access the growth story in the emerging markets is through Western companies that are doing business in the region," said Mr Connolly. "A number of funds, such as M&G Global Basics and AXA UK Select Opportunities, are positioned to try and benefit from this."
Geoff Penrice at Honister Partners, believes the key to reducing the risks involved in investing in emerging markets is to diversify as widely as possible, and suggested the Dimensional Emerging Market Core Equity fund is worth a look.
"It does not pick individual equities as stock selection is a strategy that is expensive to administer, fraught with risk and very hard to do successfully on a consistent basis," he said. "Instead, it invests across the whole of the emerging market arena which gives the fund incredible diversity and reduces risk. It does not slavishly track the markets but will spread widely and include investments into small and value shares to increase the long-term potential for returns."
Whichever route is chosen, it's essential that investors put their faith in experienced fund managers, according to Mr McDermott.
"They also want those that can do well in both good times and difficult periods," he said.
"The two stand-out candidates are Aberdeen and First State that have good, long-term track records and have outperformed in tough times."
Best-performing sectors over the past decade
1. IMA China/Greater China 202.15%
2. IMA Global Emerging Mkts 191.43%
3. IMA Specialist 161.93%
4. IMA Asia Pacific ex-Japan 151.33%
5. IMA European Smaller Cos 131.30%
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Regular cast member Ste Hay, played by Kieron Richardson, is about to test TV boundaries
How to cut the cost of car insurance: A five-step guide to getting a better deal
How not to go into the red over Christmas
Simon Read: The only place for debt is out in the open, don't be afraid to ask for advice
Families pay the price of superfast broadband
Donald MacInnes: I was fired for making up horoscopes and then my lifestyle deteriorated
- 1 Lee Evans announces retirement from comedy on The Jonathan Ross Show
- 2 Pirelli calendar 2015: The problem with 'plus-size' models like Candice Huffine
- 3 These grandmas smoking weed for the first time are wonderful
- 4 Woman opens professional cuddling shop – gets 10,000 customers in first week
G20 summit: Enter Putin. Accompanied by four warships. To the sound of mockery
'Muslims pre-date Columbus in discovering America,' says Turkish president Erdogan
David Cameron 'compares Vladimir Putin’s Russia to Nazi Germany' ahead of tense meeting
Former Tory PM Sir John Major says 'we would not have an NHS without migrants'
France 'blocks' Russian sailors from boarding a warship
G20 summit: David Cameron warns Vladimir Putin that Russia's relationship with the West is at a 'fork in the road' over Ukraine
iJobs Money & Business
£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
$175 - $200 per annum, Benefits: full benefits: Carlton Senior Appointments: P...
Not specified: Carlton Senior Appointments: Senior MD Financial Advisor - San ...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens