Looking further afield for growth | January 23 2012
Can Asia and emerging markets offer better investment returns?
In 2011, Brazil overtook the UK as the world’s sixth largest economy, according to the Centre for Economics and Business Research. Yet, surprisingly, in investment terms, Brazil is still classed as an ‘emerging market’.
Brazil is certainly not on its own. Amongst the top 20 countries in terms of GDP in 2010, 11 countries, including China, India, Russia and Brazil, are classed as either ‘emerging’ or within the ‘Asia’ region from an investment perspective. Together these countries account for $26tn of GDP, against $31.6tn for the US, EU and UK combined*.
In fact, according to Schroders, the Asian region contributes 28% of global GDP and has 64% of the world’s population yet only occupies 12% of global market indexes. In a recent investment event, M&G showed that emerging markets make up 87% of the world’s population, 81% of the world’s land mass, 37% of GDP but only 13% of global market indexes.
In addition, Asian & emerging economies are growing quicker than the more developed western economies and have been less impacted by the credit crunch. Asian consumers and governments have significantly higher savings than their western counterparts, which leaves them in a strong position for higher government investment and stronger consumption.
However, regardless of the long-term opportunities there are some key considerations to investing in Asia or Emerging Markets. Firstly, they are more volatile; Asian and emerging stockmarkets tend to rise and fall at a greater rate than the more mature stockmarkets of the UK, Europe and US. Secondly, valuation still matters; so buying into a good long-term investment story is unlikely to deliver good returns if it’s already accounted for in the price. Thirdly, corporate governance is still lacking in many of these regions; for example 80% of the Chinese stockmarket and 60% of the Russian stockmarket are effectively owned by their respective governments, who often have different aims from shareholders.
To manage these risks, it makes sense to only allocate a small amount of a portfolio to these regions; dependant on your age, objectives and attitude to risk. Equally, buying when markets have had a poor year, as they did through 2011, can help to ensure you’re getting more reasonable valuations. Thirdly, trusting an experienced manager (for example Abderdeen or First State) who knows these regions, the companies and the pitfalls inside out, can pay real dividend’s.
*CIA World Factbook 2010 est
The views expressed in this article are those of the author and are not intended as personal advice. Capital values and income can go downs as well as up. When you are considering making a lump sum investment or saving regularly it is important that your investments meet your attitude to risk and your objectives. Please contact us for more information or to arrange an appointment to discuss your investment options. Protection & Investment Ltd are authorised and regulated by the Financial Services Authority.
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