Now could be the time to diversify into the world of emerging markets

Carolyn Black, Associate Director, Myddleton Croft Investment Managers

WHILST THE world’s developed markets are proving challenging as a result of debt heavy balance sheets, political wranglings and wavering monetary policies, investors’ attentions are turning to previously out of favour alternative geographical regions where interesting opportunities are coming to light.

One such area is the emerging markets (EM) which fell out of favour in 2018, resulting in the MSCI Emerging Markets index declining by 17 per cent, as investors sought ‘safe’ investments in the midst of global uncertainty.

EM are generally classed as higher risk than their developed market counterparts and, though they may have some characteristics in common with developed markets, they do not satisfy the demands required to be classified as a developed market.

The term ‘emerging markets’ encompasses a diverse range of countries including Brazil, Peru, India, China and the Philippines, all with their own unique economies, cultures and political systems.

The countries which make up EM indices often have little in common with each other, some will be influenced by global commodity demand (Brazil), some will be beholden to challenging politics and questionable leadership (Venezuela) and some will be dependent on international manufacturing activity (China).

Investors must therefore research the routes to EM investing thoroughly, selecting regions which appear to represent the best value given the wider global context, as opposed to applying a broadbrush strategy across all EM regions at the same time. EM appear good value at present versus developed markets such as America, not only following the decline in 2018, but also as the dollar is set to weaken during 2019. Much EM debt is held in dollars and therefore a weaker dollar will reduce this debt burden and the associated interest payments. Economists often regard a peaking dollar as a good sign for EM. In the meantime, EM currencies and markets continue to appear cheap. Aside from economic factors signalling opportunities within EM, we have also seen social, political, cultural and governance developments in some regions which make them more attractive and easier to invest in than previously. Having said that, EM tend to lack the transparency of developed markets and can often be much more volatile. A seemingly small and insignificant development can lead to major and long-lasting repercussions in some regions.

If you are considering a diversifying addition to your portfolio, an EM fund may fit well into your portfolio. Make sure you research the available funds thoroughly to understand which markets they are investing in, the type of investment strategy they employ and the experience of the fund managers. Alternatively, feel free to get in touch to discuss the theme further.

■ Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. This material is not intended as an offer or solicitation for the purchase or sale of any security or any other action, without first seeking advice as to the suitability of it for your needs.