Risky markets with growth potential
Emerging markets can be rewarding for the long-term investor
● Global emerging markets are showing interesting growth trends that make them worth considering for your investment portfolio. But they come with greater risk than developed markets and you need to choose carefully.
Emerging markets are prone to fall out of favour when global investors get nervous, and regulation can be slacker than in developed markets.
Lisa Haakman, a member of the emerging markets team at Coronation Fund Managers, told a recent investment seminar of the Actuarial Society of SA that South Africans might ask why they should consider investing in emerging markets when they are faced daily with headlines of load-shedding and corruption in their own emerging-market economy, and hence experience first-hand some of the issues plaguing emerging markets.
Fear of missing out
However, if you are not investing at least some of your money in global emerging markets, you will lose out on market attributes that are not available in developed markets, she says.
Jason Swartz, the head of portfolio solutions at Satrix, says strong growth rates in emerging markets may seem appealing, but the reality is that investing in these markets can be risky. They are volatile due to exposure to many sources of country- and stockspecific risk, primarily driven by the distinct drivers of returns linked to currencies, commodity prices, economic growth and government policies for each country, he says.
Andrew van Biljon, a portfolio manager at global investment advisory and financial analytics firm Riscura, agrees that emerging markets are typically more volatile and more risky, but with greater risk comes greater potential reward. This makes them better suited for long-term investors, he says.
Rob Johnson, head of investments at Nedgroup Investments, which has launched a new global emerging-markets fund, says that from a South African investor perspective, these markets offer diversification and exposure to emerging companies with faster growth prospects than their developed-market counterparts.
“The math is simple — as more people emerge from lower incomes into higher income brackets, they will inevitably consume more. You are already seeing interesting trends emerge in Asia, particularly in the consumer space, as income medians rise with the development of these economies,” he says.
Emerging-market economies are positioned to outperform developed markets in the medium to long term, he says.
According to Thornburg Investment Management, a US-based global investment business, emerging markets are home to more than 80% of the world’s population and account for just under 40% of global GDP, yet their financial markets account for about 20% of global market capitalisation. This dynamic has to change and technology is making this transition easier, Johnson says.
Riscura’s Van Biljon agrees that offshore investments are a key diversification strategy for South African investors, who for the most part follow the global benchmarks that usually end up directing offshore investments to the US.
About 60% of MSCI world benchmark investments are invested in the US, but this is set to change over time with the rise of emerging-market economies, such as China.
“We believe China is simply too large an opportunity to ignore, as it is set to become the world’s No 1 economy by 2030.
“Other emerging markets, such as India and Brazil, also offer opportunities for growth while providing opportunities to diversify, but what makes China interesting at the moment is that it has previously been a difficult market to access,” Van Biljon says.
Coronation’s Haakman lists several reasons that emerging markets are offering good upside for investors.
Many businesses in emerging markets are at the start of their growth journey, whereas in developed markets many companies are often in the mature or declining phase of their lifespans.
The rise in wealth among consumers in emerging markets allows them to start making discretionary purchases, in, for instance, unit trusts and life insurance, Haakman says.
The formalisation of emerging markets is another reason. In India and Russia, for instance, consumers still buy a large proportion of their groceries and clothing from informal vendors and markets. As these markets formalise, there will be opportunities for investors.
In many emerging markets, a large part of the population does not have bank accounts or debt, which represents an exciting opportunity for financial services companies and for investors in those companies, she says.
Finally, rising wealth in some emerging markets is leading to consumers switching from unbranded to branded goods. Companies are taking advantage of this strong trend, and investors in such companies can reap rewards.
But, Haakman says, you need to avoid some companies in emerging markets entirely, and with others you need to make sure you invest an amount that is appropriate in view of the inherent risk.
Not all emerging countries are the same, says Johnson. Selecting a country to invest in can be at least as important as selecting the right business in which to invest, he says.
China is too large an opportunity to ignore, as it is set to become the world’s No 1 economy
Andrew van Biljon