Investors should look at new frontiers
The BRIC (Brazil, Russia, India and China) success story – in particular China’s dominance, tends to overshadow other emerging markets that are also enjoying attractive growth, and in some cases, more attractive valuations.
China’s astronomical rise has been attributed to a fundamental shift in geographical economics.
“It’s a transformational event but there are huge and really exciting opportunities in equity growth in other countries like Indonesia, Poland and Turkey,” says Tom Slater, deputy manager for Baillie Gifford’s Scottish Mortgage Investment Trust.
As a new burgeoning middle class develops in the BRIC economies, the question ‘what is an emerging market?’ has been raised. “There are very developed areas of China and there’s something very arrogant about referring to it as an emerging market,” says Slater.
Aside from the BRIC economies, there are 18 other emerging markets and a further 25 frontier markets for the investor to consider. Dan Tubbs, co–manager of BlackRock’s Global Emerging Markets Team, encourages investors to look at these countries, which have received less attention to date.
“Many of these countries have as good, if not better, growth characteristics than the BRIC economies. Two key structural drivers we are seeing within emerging markets are the favourable shift in demographics and the rapid growth in domestic consumption.”
Tubbs cites motor industry sales as a case in point. Since the start of 2008, sales are up by 35% in emerging markets whereas they are still well below 2008 levels in developed countries.
A quick look at the average GDP growth of developing countries against developed tells the same story: Peru’s 7% GDP average growth and Indonesia’s 5.5% compares to 1.1% in the US, 0.8% in the UK and a paltry 0.05% in Japan.
Emerging stockmarkets have also outperformed: Egypt has returned 230% over five years and Korea 110% while the UK, US and Japan have returned between 8% and 11%.
What other emerging markets are worth looking at?
* Saudi Arabia: The young up-and-coming population is driving domestic consumption. Its government has a huge infrastructure spending programme and Tubbs calls it an “undiscovered opportunity for investors” given that foreign investors make up only 0.5% of the Saudi stockmarket.
* Qatar: “One of the world’s fastest growing economies,” according to Tubbs. It has stronger annual GDP than China and is a leading liquefied natural gas producer with 14% of the world’s gas reserves.
* South Korea: Domestic economy grew by 7.8% year-on-year in the first three months of the year. It has world–class companies, such as Hyundai Motors and Samsung Electronics, which are benefiting from strong exports and gaining a global market share.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.