Investors should look at new frontiers

12 May 2010

Investors should not just look at the BRIC economies when investing in emerging markets, according to industry experts.

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.

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