Investing? Emerging Markets Warrant Attention, And Care
If you are looking into investing it must be noted that emerging markets are attracting a lot of attention from investors at present
. This enthusiasm is warranted on many counts, but investors delving into the developing world need to be aware of the risks that come with investing in these markets.
I recently met with the managers of the Eastpoint Global Emerging Markets Fund, an Australian fund that invests in emerging markets. They made a strong case for why emerging markets may do better than developed markets over coming years.
One of the main reasons developing countries have the potential to recover faster than developed countries is that consumers have much less debt in emerging countries than in developed countries.Mortgage debt across developed countries is around 55% of GDP, while in emerging markets it is closer to 15% of GDP. Households in countries like China save a much higher proportion of their income. This high savings ratio has meant the developing world has largely side-stepped the implosion of the debt bubble that has so impacted the developed world. The Anglo-Saxon countries, where the debt and housing bubble have been most pronounced, have been the hardest hit.
Governments are also better placed in the developing world. Governments in emerging markets also have much less debt than in developed countries. Debt held by governments across the twenty largest developed economies equates to 80% of GDP, while across emerging countries public debt is around 35% of GDP.
Perhaps the most significant issue that emerging markets have in their favour is demography. Countries in the developing world generally have a much younger population than do developed countries. It is clear that the ageing populations in countries like Japan and Germany is having a negative impact on their economic performance. At the other end of the scale, countries such as China and India have much younger populations, which should help propel economic growth over coming decades.
An unlikely, but nevertheless important, factor that may influence future economic performance is tax. Developing countries typically have lower tax rates than developed countries. Not only are taxes higher in developed countries, but many are facing the prospect of raising taxes to help pay for bank bailouts as well as burgeoning healthcare and pension costs.
All of these factors mean that emerging economies have the potential to generate a higher level of GDP growth than we may see across developed economies. The deleveraging of household balance sheets may mean that economic growth will be as low as 2.5% a year over coming years across developed economies. This is a far cry from the 3.7% seen over the past five years.Emerging economies are forecast to grow at double this rate. This faster growth should mean higher levels of growth for companies and therefore better performing share markets in emerging markets.
Emerging markets currently account for just 24% of the total value of world share markets. This is set to rise as their performance relative to the major developed economies improves.While the long-term outlook for emerging markets is compelling, there are risks in investing in these.
Emerging countries face massive political, legal, social and financial hurdles on their journey towards prosperity. Investors in emerging markets bear these risks.
Share markets in emerging markets are also more volatile than in developed countries. The Chinese market is a shining example of this. Over 2006 and 2007, the Chinese share market rose an incredible 370%. Then, over 2008, virtually all of this gain was wiped out when the market fell 70%. In the first five months of this year the Shanghai exchange has again risen strongly, gaining 90%. But yet again these gains have been short lived.
Over August it has fallen 22%.The key message is that investing in emerging markets has merit, but it requires a careful approach, a hard hat, and a very long-term perspective.
by: Cam Watson
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