Sep/10 - Why invest in "emerging" markets?
When asked to consider investing in emerging markets you would normally think that you are taking a big risk with your investment.
This is not the case anymore. Emerging markets should now be considered as part of everyone’s investment strategy, here are 5 reasons why this is so:
1. Drivers of global growth
According to recent International Monetary Fund's estimates, China is the single country that contributes the most to global economic growth, with Russia, Brazil and India also among the top eight contributors. Higher growth tends to lead to higher equity market returns.
2. Favourable demographics
Emerging markets represent approximately 75 per cent of the world's land mass and contain more than 80 per cent of the global population.
Most of the future population growth is expected to be in emerging markets, where the population is expected to grow five times as fast as in developed countries. This means emerging markets tend to have a high – and growing – proportion of young, skilled people that contribute to the growth of their economies. This, in turn, will lead to higher equity market returns.
3. A high and growing number of consumers...
By 2030 more than one billion people in emerging markets are forecast to join the ever-increasing consumer middle class. Currently, personal consumption in China accounts for only 37 per cent of GDP, compared with more than 60 per cent and 70 per cent in Europe and the US respectively. There is, therefore, scope for significant further spending.
This will boost these economies and would normally mean higher equity market returns.
4. ...with money to spend
The world's savings are concentrated in emerging markets, which hold 75 per cent of the world's total foreign exchange reserves.
Emerging economies are less indebted than their developed peers at the country, company and individual level.
Importantly, banks in emerging market countries have emerged from the recent credit crisis relatively unscathed as they generally had little or no exposure to the ‘toxic assets' associated with the sub-prime mortgage fallout in the US. This provides strong foundations on which to build future growth.
5. Equity outperformance
Emerging market equities have outpaced their developed market peers both since the launch of the MSCI Emerging Markets Index in 1987 and over the past ten years, during which they have outperformed by over 150 per cent.
So, you have been getting higher returns but are you taking a bigger risk by investing in emerging markets?
Over the past ten years a portfolio that includes exposure to both emerging and developed markets would have demonstrated a similar level of volatility as a portfolio invested in just developed markets.
BUT the portfolio with emerging market exposure...
...would have provided far superior returns.
Our conclusion therefore is that it is imperative that your portfolio has exposure to the emerging market sector. The Simple Solutions investment process has included emerging markets in client portfolios for risk profiles 2 – 10 since we developed the process.
We believe that exposure to this sector in the medium to long term will deliver strong returns for our clients.
You should be aware that past performance is not a guide to the future. Investments can go down as well as up.
If you would like to arrange a meeting with one of our Advisers to discuss how we can help you please contact us.