Looking further afield for long-term winners

Published on Friday 30 October 2009 20:29

LONG associated with heart-stopping turbulence, emerging markets have become the place to be for investors as developed economies undergo a more tentative recovery.

The average fund in the Investment Management Association's global emerging markets sector has grown more than 85 per cent over the past year, while emerging markets investment trusts have posted a similar average.

Their robust recovery from the global downturn has prompted some revision of the risk posed by emerging markets, particularly for individuals with ample investment years before retirement.

So is there now a danger that some investors are under-exposed to emerging markets, or does that downplay the sector's volatility and risk?

New research from Ignis Asset Management shows that while most investors believe emerging markets will be the strongest performer over the coming years, a third have no exposure to the sector, while the majority that do have less than 10 per cent exposure.

Daniel Tubbs, fund manager in the global emerging markets team at BlackRock, said the benefits of young and increasingly prosperous populations made global emerging markets an attractive investment.

"The inescapable fact is that emerging markets are becoming bigger and more important to the global economy," said Tubbs. "We have seen a major shift of economic power towards emerging markets over the last 20 years – they account for almost half of the world's GDP."

The average emerging economy has grown by 130 per cent since 1992, compared to the 38 per cent growth experienced by members of the G7 group of countries. And problems previously associated with emerging market countries, such as high debt levels, have diminished, said Tubbs, who believes Brazil, Russia and the Middle East are particularly attractive owing to strong growth and attractive valuations.

But how much should investors hold in emerging markets? Juliet Schooling Latter, head of research at Chelsea Financial, believes investors with an appetite for risk should have up to 20 per cent in emerging markets.

"The trend is here to stay. We know the developed economies are in a bad state and that the growth is coming from developing markets," she said. "These markets are still maturing and will be volatile for the next ten years but that also means greater growth."

However, she cautioned that the growth of recent months made valuations less attractive than at the outset of this year.

But Iain Wishart, chartered financial planner and proprietor of Wishart Wealth Management in Edinburgh, said emerging markets should comprise no more than 5 per cent of an individual's portfolio: "We deem this style of fund to only be suitable for adventurous investors as there are currency and political risks."

While commodities demand is in favour of emerging markets countries, and some countries are protected by strong current account surpluses, several economies still require significant support from international bodies.

"Many central banks are becoming concerned about inflation risks. Some economies are supported by strong links to China but others remain exposed due to the lack of available investment," said Wishart.

Tom Munro, director of IFA Tom Munro Financial Solutions, was more upbeat, despite concerns that as the established economies of the western world slow down, there will be less demand for goods manufactured in countries such as China.

"Over the longer term, however, I believe China, along with the wider emerging and Asian markets, will enjoy above average returns as we gradually emerge from the global recession, so exposure to the sector, say for long-term pension planning, remains a wise choice," Munro said.

Investors with a suitably high risk tolerance should hold no more than 5 to 10 per cent of a well-diversified portfolio invested in emerging markets at one time, he added.

Funds in the sector range from those investing across emerging markets regions to individual country funds. Several funds also focus on the "Brics" countries – Brazil, Russia, India and China.

While individual countries such as China, Russia and Brazil may seem particularly attractive, most advisers recommend exposure to those countries through funds investing across the entire emerging markets universe.

"There are funds that cater for different risk levels too," said Schooling Latter. "For instance, the First State Asia Pacific Leaders fund is at the more cautious end, while at the other end you could look at a country-specific fund."

Both Munro and Wishart favour the 952 million Aberdeen Emerging Markets fund, run by Devan Kaloo, which has returned 93 per cent over the past year.

Munro also likes Blackrock Emerging Markets, while Wishart picked out global emerging markets funds from Axa Framlington, First State and Baillie Gifford plus Latin American funds run by Invesco Perpetual and Threadneedle.

IN NUMBERS

&#149 In 2008, emerging markets accounted for 34 per cent of global GDP. In 2020 that is forecast to reach 43 per cent.

&#149 In 2008, emerging markets accounted for 11 per cent of global market capitalisation. In 2020 that is forecast to reach 26 per cent.

&#149 Emerging markets account for 70 per cent of global landmass and 70 per cent of foreign exchange reserves

&#149 80 per cent of the world's population lives in emerging economies

&#149 Emerging markets hold over 90 per cent of oil and gas reserves, 70 per cent of coal reserves and 60 per cent of copper, nickel, iron ore and bauxite reserves.

Source: JP Morgan