A good time to take that plunge into emerging markets

IT IS that time of year when investors are spring cleaning their finances, reviewing their individual savings accounts and equity portfolios and wondering again whether to be a bit braver.

For many investors and their advisers, investment in emerging markets, whether in equities or bonds, is still seen as highly risky and distinctly exotic. Indeed, some appear to believe they are traded by a one-eyed camel dealer emerging from a side alley in Ulan Bator at dusk. When I tell people that the T Bailey Growth Fund holds about 15 per cent in emerging market equities, I often hear a sharp intake of breath and muttering about "risk, need for security, old boy, better to have some more in the States".

The problem is that these unreconstructed views appear to be part of the mindset of sophisticated professional traders and hedge fund managers. At any discontinuity in markets, whether caused by unexpected increases in US interest rates or by terrorist atrocities, then Asian and other emerging markets plunge as investors head for the perceived safety of US and European exchanges. Just look at what happened in May last year when global markets belatedly woke up to the realisation that the Federal Reserve was set to raise rates still further. Between then and the end of June the S&P 500 Index fell by 3 per cent in sterling terms while the MSCI AC Far East ex Japan and MSCI EM (Emerging Markets) indices dropped by 10 per cent and 14 per cent respectively.

As is so often the case, perception fails to reflect reality. Emerging markets are not flimsy insubstantial economies, at least not the major ones. Taken as a whole they make up more than 40 per cent of total world GDP as measured on a purchasing power parity basis. The bulk of that of course is made up of the BRIC economies (Brazil, Russia, India and China) plus South Africa.

And these are no flabby stagnant giants. They are growing at between 6 per cent and 10 per cent each year compared with the pedestrian 2 per cent to 3 per cent trend growth of developed economies. By and large they have strong balance of payments and fiscal balances. Many have reached the stage where internal consumption is absorbing more and more economic activity, reducing the dependence on exports and vulnerability to a world slow-down.

So when the chips are down and cries of "sell, sell" echo in the streets, where would you rather have your savings? In fast growing economies with treasuries bulging with assets, or in the US with its endemic imbalances and an economy supported by overstretched consumers?

All of this is balanced on an over-blown housing market where sales are falling; profits are at record levels as a percentage of GDP and unlikely to take an even bigger share; and the dollar is crumbly.

It may take a while but eventually perceptions catch up with reality. And our view is that we will then see a market plunge leading to a flight to quality in emerging market securities.

• Richard Martin is chief executive of T Bailey, a multi-manager