Keep a good fo­cus on emerg­ing mar­kets

The Jewish Chronicle - - Business - MICHAEL RA­NIS

CHINA? Brazil? In­dia? What has the world come to that th­ese are the coun­tries that seem to at­tract in­vest­ments from all cor­ners? Is the el­e­vated sta­tus of emerg­ing mar­kets just a fash­ion­able con­cept, or is this the em­bod­i­ment of a mas­sive tran­si­tion? Does it re­flect on “the de­cline of the West” and a rise of new, far-away pow­ers, or just some mirage that will soon fade? Let us con­sider a few facts:

It is quite pos­si­ble that my chil­dren (aged 16 and 20) will see China’s GDP sur­pass that of the USA. It is equally likely that they will see the com­bined economies of Brazil, Rus­sia, In­dia and China (the fa­mous BRIC coun­tries) sur­pass in size the com­bined economies of Europe and the USA. Whether we like it or not, that is real, in­ex­orable, change and it com­mands our at­ten­tion.

Though we tend to have a de­ri­sive view to­ward “third-world” coun­tries, a view that sees them as cor­rupt and dis­or­derly en­ti­ties, we need to rec­og­nize that, at least in some of them, there has been a sig­nif­i­cant trans­for­ma­tion to­ward adopt­ing west­ern con­cepts re­gard­ing law, prop­erty and in­for­ma­tion.

Po­lit­i­cally, most of the emerg­ing mar­ket world may have im­proved, but the im­prove­ments are lim­ited and still pro­vide plenty of rea­sons for con­cern. This is prob­a­bly the gravest achilles heel for in­vestors in emerg­ing mar­kets.

Most emerg­ing mar­kets are fac­ing dis­turb­ing prob­lems, in part stem­ming from their rapid growth. We have all seen the wor­ri­some pic­tures of over­pop­u­lated cities, pol­lu­tion, traf­fic bot­tle­necks, large dis­par­i­ties be­tween rich and poor. It is not al­ways clear how th­ese prob­lems will af­fect in­vestors and their choices, but we need to be aware of them.

What is one to do about all of this as an in­vestor? It seems to me that we must be­gin but tak­ing a fresh look at our port­fo­lios. Do we give enough weight to th­ese mar­kets? I do not think that I am too far off the mark if I claim that in most port­fo­lios, the weight of all eq­uity and fixed in­come ex­po­sure to emerg­ing mar­kets is sig­nif­i­cantly be­low 20 per cent of to­tal as­sets. That said, de­pend­ing on the risk tol­er­ance, I have seen al­lo­ca­tions of up to 40 per cent.

For those who are less will­ing to in­vest in such mar­kets, a valid strat­egy should be to iden­tify prox­ies: com­pa­nies whose busi­ness are likely to profit from the ex­po­nen­tial growth in th­ese economies. That ap­proach has some sig­nif­i­cant ben­e­fits and cur­tails some, but surely not all, the neg­a­tives. The bot­tom line is that this is a much more in­ter­con­nected world, and our in­vest­ments should re­flect this.

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