Juicy pickings if you can get it right

It has been the kind of investment trip to which the old cliche "roller-coaster ride" hardly begins to do justice. In any developed market it would have taken a catastrophic economic collapse followed by near complete recovery to have produced a similar effect. It was, in short, a normal phase in the notoriously volatile world of emerging markets.

It began late last year when the economic and currency crisis in Mexico sent its stock market into a tailspin. Between December and March it lost two-thirds of its value. The panic spread to the other Latin American and unrelated markets in the Far East and elsewhere. Turkey, for example, had also fallen by two-thirds come April.

Then investors realised that Mexico and the other emerging markets were not going to vanish in a puff of smoke and confidence returned. In the past few weeks, Mexico has risen 30-40 per cent from its low point, while Turkey - the world's best-performing stock market this year - has doubled since last month.

What is more, the prospects for further increases look extremely good. Now that emerging markets have the bit between their teeth again, there is every reason to suppose they will head back at least to their previous levels, as Turkey has already done. "I expect that by the end of this year Mexico will have doubled from it lowest point," said Ken King, head of emerging markets at Kleinwort Benson.

This suggests there are juicy pickings to be had for the bolder private investor. But how do you get a slice of the action?

The only practical way is to put your money in an emerging markets unit or investment trust. This gives a spread of investments, thus limiting the risk to some degree, as well as management by people who know the markets from personal experience.

There is, inevitably, a fair range of choice, which gives investors flexibility in deciding their own strategy. You may feel, for example, that since Latin America fell hardest it will recover most spectacularly. In which case it is worth going for one of the regional funds specialising in Latin America, such as Templeton Latin America. The risk is undoubtedly greater but the returns may be higher.

A more cautious approach would be to go for one of the global emerging market funds that spread their risk by covering the Far East, Eastern Europe and South-east Asia as well as Latin America.

Another factor to watch, although it may not be so easy to determine, is a fund's investment strategy. In some funds there is a natural tendency to remain in rapidly rising markets until they hit the top. A fund like Kleinwort Emerging Markets, however, takes a more sophisticated view of the volatility of these markets. It allows a maximum limit of 10 per cent of the fund to be invested in any one market. If the market rises by more than 50 per cent within a 12-month period, however, it must reduce its holding to 7.5 per cent. It starts to sell out rather than hold on.

The reason is that the higher a market rises, the greater the risk that it is reaching its peak. It is, Kleinwort believes, wiser to get out while still ahead and reinvest in cheaper markets. Besides, if you wait until an emerging market hits the top or the bottom it is always harder to bail out or buy in because market liquidity tends to dry up very rapidly. Better instead to catch the market on the rise or fall. That often means anticipating the next change of direction early.

"There were times when we felt like the only buyers of Mexico when the market was falling last December," Mr King admitted. "It felt very lonely out there."

The usual advice to emerging markets investors is to go in for the long term so that the ups and downs balance eachother out. "I wouldn't urge people to invest for the short term," says Austin Forey of Robert Fleming's Emerging Markets Fund.

Strikingly, the recent crisis seems to show that investors have taken this advice very much to heart. In developed markets, the usual pattern is for investors to pile out of investment and unit trusts when there is a big price fall. But to the amazement of almost every fund manager in the business, emerging markets investors kept their nerve as markets plunged. There was no wholesale flight from the funds.

This admirable stoicism means that for new investors it is not as cheap to buy into some funds now as you might have expected. If investors had panicked, investment trust shares would have dropped to a significant discount to net asset value, making them a very attractive buy now. In fact, however, the discounts that did emerge were only wafer-thin, so investment trust shares cannot be picked up at bargain basement prices.

Nevertheless, emerging markets still look a good bet. And since they are rising so strongly there must be a strong argument for a short-term punt. Investors going into a market like Mexico for the next six months or so could garner a futher 60 per cent rise in share prices. It would, of course, be a fairly high-risk strategy since Mexico's economy still faces considerable problems, but the potential rewards are clearly very tempting.

Latin American Top 10

Best performing Latin American investment and unit trusts

pounds 100 invested from 1/12/94 to 15/05/95

Fund pounds

1 Templeton Latin America 81.28

2 Abtrust Latin America 79.76

3 Scudder Latin America 73.02

4 Latin American 69.04

5 S&P Latin America* 68.89

6 Abtrust Latin American* 66.89

7 Morgan Grenfell Latin American 65.66

8 Edinburgh Inca 65.31

9 Perpetual Latin American Growth* 63.96

10 Old Mutual Latin American Cos.* 60.42

* Unit trusts.

Source: Micropal

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific