|
| Personal finance articles |
|
|
|
Profits all around the globe
By Jeff Salway
When stockmarkets take a tumble, it's generally the less mature markets of the world that take the biggest hit. At least, this has been the case historically. But while uncertainty has enveloped the markets of the west in the wake of the ongoing credit crunch, emerging markets have earned their spurs, rewarding investors with continued strong performance.
Despite market turbulence in recent months, funds investing in emerging markets returned 34% in the 12 months to the end of December 2007, according to the Investment Management Association, with developed economies taking the brunt of the credit crisis. The UK All Companies, for instance, grew by just 1.9% over the same period.
While this doesn't mean emerging markets are no longer risky - they are certainly not for the fainthearted - it does show the value of diversification through exposure to different markets.
"There's a considerable amount of risk, especially if you invest in single country funds, but diversifying through a little bit of emerging markets exposure can reduce portfolio risk," says Juliet Schooling, head of investment research at Chelsea Financial.
At the centre of the emerging markets phenomenon has been the BRICs countries - Brazil, Russia, India and China. According to investment bank Goldman Sachs, five of the world's top 10 most populous cities are located in the BRIC countries, while it also predicts that the middle class in the four countries will exceed 500 million by 2010. The effect of that growing consumer economy is already notable - the MasterCard Index, which ranks 50 cities according to their financial power, includes five from BRIC nations.
But as these rapidly growing economies become more popular with investors, the danger is that they will become more expensive too. Jonathan Asante, co-head of First State's Global Emerging Markets fund, has already warned investors that some established emerging markets, particularly China and India, are overvalued.
That's why the best investors are always on the look out for the next big thing, seeking the less well-known countries that could be poised to follow in the footsteps of China and its BRICs brethren. So, where are the next hot spots?
Africa
When New Star launched its Heart of Africa fund last October, the coverage it received was largely due to its rarity as the first UK-based unit trust focusing solely on Africa. The fund focuses on central Africa, with Nigeria and Ghana prominent in the portfolio but South Africa excluded. 'The continent has tremendous potential for capital growth," says manager Jamie Allsopp.
Even though it's at an early stage in its economic development, there are some compelling reasons why Africa could be the source of some juicy investment returns in future.
Average GDP has grown in each of the last 12 years, albeit from a low point, while inflation is less volatile and falling. The economies in many African countries are also benefiting from rising affluence in Asia - China especially - as demand for raw materials continue to soar.
Similarly, frontier markets such as these have a relatively low correlation with world market fluctuations, so they can offer diversification for investors with a taste for adventure.
But the risks of investing in Africa are massive, as Allsopp readily admits. Political instability continues in some countries, most obviously Zimbabwe and most recently Kenya, while civil war elsewhere spreads ripples of uncertainty to the countries that are open to investment. This means that anyone investing in Africa needs to be prepared to make losses as big as the potential gains.
With New Star ahead of the pack in offering UK investors a route into Africa, there's not exactly a lot of choice when it comes to getting exposure to this story. Investec has two offshore pan-Africa funds and is planning to launch an Africa Investment Trust allowing smaller investments, while Fidelity launched its offshore Europe Middle East and Africa fund last July.
Malaysia and Indonesia
In the mid to late 1990s, the investment world hailed the Asian 'tiger' economies, such as Thailand, Malaysia, South Korea, Taiwan and Indonesia, as the next big thing. That was before they collapsed, in spectacular fashion.
But these countries are back, with optimism founded more on fundamentals and less on the hype that surrounded them in 1997. And while China, India, Korea and Taiwan account for most Asian fund holdings.
Both Indonesia and Malaysia have made a substantial effort to improve their fiscal position, says Shelley Kuhn manager of the Neptune India and Asia Pacific Opportunities funds and assistant manager of the Neptune China fund. "Because of the 1997 crisis, these countries have now put themselves in a good fiscal position, with strong trade and current accounts."
Malaysia and especially Indonesia are both particularly sensitive to market sentiment, warns Kuhn. "With lots of emerging markets, especially those with a large export base, a global slowdown can hit very hard. "
In Indonesia, adds Kuhn, there is also the issue of high unemployment and fragile consumer spending to bear in mind.
The best way to access these markets is not through country-specific funds however, explains Juliet Schooling. She favours the First State Asia Pacific Leaders fund run by Angus Tulloch, which invests 20% in South East Asia and the Martin Currie Asia Pacific fund, which has 6% and 3% in Malaysia and Indonesia respectively. Kuhn's Asia Pacific Opportunities fund, which has 25% invested in China, has a higher Malaysia weighting than most funds in the Asia excluding Japan sector, at around 12%.
Mexico
In Latin America, Brazil is by some distance the place to be for investors. But Mexico is increasingly drawing the eye of shrewd investors.
"Mexico is a very difficult one to assess at the moment, because no other emerging market is quite so dependent on the US," Peter Bickley, director of economics at Tilney, the UK arm of Deutsche Bank Private Wealth Management explains. "However, banking and telecom companies make up over half the Mexican index and they are less affected by the US economy. Mexican firms are diversifying and exporting more to Europe and other emerging markets, while there has been good progress lately on tax and labour market reforms, which is encouraging."
A lot of companies in Latin America have benefited from infrastructure investment right across the region, points out Urban Larson, manager of the F&C Latin American fund. "In Mexico, for example, the government has committed £105 ($235) billion to infrastructure between 2007 and 2012 and we believe ICA, Mexico's largest construction company, stands to benefit."
Presently, Mexico is ranked the world's 15th biggest economy, but its projected growth is such that the IMF believes it could be the fifth largest by 2040.
The big drawback to Mexico is that much of its economy is built on trade with the US - around 80% of its exports go north of the border, while 50% of imports make the reverse trip, so it's very sensitive to the US economy. The government, however, is seeking to reduce that dependency.
"Latin American funds are the best way to gain exposure to Mexico," says Juliet Schooling. "We like the Threadneedle Latin American fund, as they've been in Latin America for many years."
While Larson also invests primarily in Brazil, Mexico now accounts for 25% of his fund. A glance at some leading emerging markets funds also reveals Mexico's growing prominence in their portfolios. The Gartmore Emerging Markets Opportunities fund invests over 5% in Mexico, while others with similar weightings include the emerging markets portfolios from Fidelity, Baillie Gifford and Martin Currie.
Turkey
While it's a more developed country than most emerging markets, Turkey has often passed under the radar of investors. This is partly because of historical economic problems, such as inflation, but that's now under control, tumbling from 29.7% in 2002 to 7.5% in late 2007. Over a similar period, direct foreign investment has increased 20-fold.
"Turkish economic growth rates over the last five years have averaged 7.5%, with foreign trade averaging 26% a year," says Ajkut Halit, of Arkan & Ergin Grant Thornton in Turkey. "These rates are unprecedented and reflect the great potential of Turkey brought forward thanks, among other things, to continued political stability over the same period."
This is why Turkey is considered the fifth BRIC country, with some funds investing in TRICs - Turkey, Russia, India and China. The Istanbul stock exchange's main index saw returns of nearly 70% last year (as of late November) and its size means there is plenty of liquidity, meaning that it's not difficult to get in or out.
Some issues threaten to undermine that stability, however. Turkey's recent flirtation with an invasion on northern Iraq to fight Kurdish rebels would not sit well with many of the countries investing in the Turkish economy. Similarly, EU accession has been a big driver of political and economic reform, but so far it's failed to meet membership conditions, while France remains against its inclusion.
That doesn't stop it being popular with emerging markets and Eastern Europe fund managers. The highly regarded Elena Shaftan, manager of the Jupiter Emerging European Opportunities fund, has over 10% in Turkey, while the Credit Suisse European Frontiers fund has 12.5%. In both cases, this represents the second biggest weighting, behind Russia.
How to get a piece of the action
There's more than one way to skin cat when it comes to investing in these exciting, but risky markets. To gain just a bit of exposure, the first step could be a multi-manager fund. Jason Britton's T.Bailey Growth fund, for example, invests 10.9% in emerging markets using funds such as the Fidelity South East Asia fund.
If you want more emerging markets in your portfolio without being entirely exposed to them, you could go for a global growth fund - with emerging markets largely responsible for driving global growth, these funds can offer a play on them without too much direct exposure.
If you have the money and the appetite to take a bigger gamble, emerging markets, Asia excluding Japan or country-specific country would be the main options. "There are very few country-specific funds in emerging markets, onshore at least, but I wouldn't be surprised to see a few more being launched," says Juliet Schooling, head of investment research at Chelsea Financial. "But it's best to invest through general emerging markets funds or a series of regional funds."
Useful links:
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View