Attraction of emerging market sector
Oct 26 2009 by Iain Laing, The Journal
SINCE the start of the summer emerging market indices have seen a sharp increase. This rise has been driven in part by the belief that the emerging market economies may lead the global recovery but also by the heightened risk appetite of investors.
Additionally with the UK and US heading towards a sustained period of indebtedness and de-leveraging, investors are looking elsewhere for returns. It is true that investing in the emerging markets is not without risk.
However many argue that, with the potential for greater returns than in the West and indeed the question of whether economies such as Brazil, Russia, India and China (“BRIC”) are truly “emerging”, it is a risk worth taking.
Investing in the far less developed emerging economies such as Peru, Egypt, Thailand and Turkey would involve accepting a far greater degree of risk. An inherent characteristic of emerging markets is volatility; markets respond aggressively to short-term news flow whilst prospects for long-term growth may remain unaltered.
For example, last week the Brazilian government announced that from October 20 it would impose a 2% tax on foreign money being invested in equities and bonds. The announcement prompted a short but sharp sell-off on the Brazilian stock exchange although the long- term prospects for the economy remain firmly in place.
Brazil remains rich in resources, specifically oil and iron ore, and it has just been announced that Rio de Janeiro will be the venue for the 2016 Olympic Games, which is likely to prompt significant investment in the country.
The emerging markets account for approximately 80% of world population and 50% of the world’s economy, yet just 12% of global equity market capitalisation, although this figure is growing rapidly. The recent $8bn flotation of the Brazilian arm of banking giant Santander is the latest contribution to this growing market capitalisation.
Until very recently the Western consumer was considered to be the main driver of emerging economies. However, this is changing. The rapid growth of the middle-class consumer has prompted the need for improved infrastructure and rapid urbanisation, particularly in China. Additionally, trade between the emerging markets continues to grow; China now accounts for approximately 12% of Brazil’s exports whilst also being a key market for Russia’s exports. Equally with a financial services industry only in its infancy there is plenty of opportunity as penetration for both mortgages and credit cards in the emerging markets is very low.
There are a number of ways of investing in these markets, ranging from a wide variety of investment funds to Exchange Traded Funds (ETFs) to UK-listed companies with a large presence in the emerging markets. Individual circumstances always vary therefore if investors are interested in adding to their exposure to emerging markets we would strongly recommend seeking professional advice.
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