Emerging markets still offer great opportunities
Long-term investors would be foolish to turn their backs against emerging markets despite the sector's two-year blip, according to Legal & General Investment Management.
Lars Kreckel, global equity strategist at Legal & General IM, says recent underperformance should not deter investors as emerging markets still offer great opportunities for, in particular, long-term investors.
"After two successive years of relatively poor performance, increased doubts surrounding emerging markets are understandable.
"In the long term, however, to disregard an allocation to emerging markets would be at the investor's peril as the drivers for growth remain in place," he warns.
Four reasons for confidence
There are four reasons emerging markets will deliver, says Kreckel.
GDP growth prospects in emerging markets will continue to beat developed countries; the risk associated with emerging market investments is in decline and the overall growth prospects of emerging economies remain compelling.
In addition, emerging markets continue to be under-represented in global benchmarks and portfolios, Kreckel says.
"Emerging markets contributed about 39% of global GDP in 2011, yet represent only about 14% of the MSCI World index. Yet many investors remain under-invested even against this low weighing, and in the long term, we see pressure on investors to increase emerging market allocations."
L&G IM expects the disappointing two-year period for emerging markets to come to an end in the fourth quarter of 2012, when we will "start to see a modest improvement".
Agreeing with Kreckel, Patrick Connolly, a certified financial planner at AWD Chase de Vere, says the emerging markets will rebound "at some point".
"Emerging markets has suffered in recent times but it's mainly due to general market sentiments. In uncertain times when investors are nervous it's always the riskiest areas that suffer the most," he says.
Echoing Kreckel's sentiment, Connolly adds the worst thing investors could do is to "pull their money of this sector" and says investors should continue to have "some exposure" to emerging markets as it remains a long-term investment opportunity.
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.