Why emerging markets may not be best place to invest

But, if we stick with China as an example, this poses two questions – will this come to pass and, assuming it does, will it translate into investors making money?

The big issue of the moment is Donald Trump’s “trade war” on China.

John Haynes, head of research at Investec Wealth & Investment, last month noted: “The important thing to remember is that both sides have more to lose than to gain from any escalation.

“Donald Trump has clear support both inside and outside America for achieving progress on a number of issues including market access and intellectual property protection, but there is also a mutual interest in sustaining a good relationship, since China is the world’s second largest economy and the biggest contributor to global growth.”

What then of the amount of debt in China’s economy?

Mr Haynes commented: “China’s debt explosion from around 150 per cent to over 270 per cent of GDP occurred in the immediate aftermath of the Great Financial Crisis when demand for consumer products in the West plunged. China reacted to the demand precipice with a Keynesian infrastructure construction boom. The money spent was borrowed from Chinese banks and savers. The banks are largely government-owned and many of the loans are ultimately government-backed. There is no reason for Chinese savers to fear that they will not get their money back.”

So, can investors make money out of China’s success?

According to the International Monetary Fund, China’s annualised real GDP growth between 2010-2017 was 7.8 per cent per annum. Total growth of the Shanghai stock market over that period was just 3.5 per cent.

Kristjan Mee at Schroders suggested in an article last year that this was largely down to the dilution effect of flotations.

He stated: “Academic research has shown that the early growth in earnings of new companies happens before they float on the stock market.

“Such growth is picked up in GDP figures, but not by the stock market.

“We found that this dilution has been considerably larger in emerging than in developed markets.

“The issue is particularly prominent in China. It has been common practice for large Chinese state-owned enterprises to be listed on the stock market at a relatively mature stage of their business life cycles.

“Investors who are truly trying to capture the fast growth in emerging markets have to be prepared to do the necessary groundwork.

“This means conducting thorough fundamental analysis of individual companies, rather than relying on broad-brush assumptions that aggregate growth will automatically translate into stock market success.” And that is the crux of the matter. Economic growth does not necessarily equal stock market growth and hence returns for investors.

A globally diversified portfolio of stocks, consistently managed, will protect investors from market risks and provide consistent returns over the long term. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice