Standing on its own two feet

Emerging markets have been the investment that often delivers high returns with the corresponding amount of risk.

In recent years, established markets have also delivered high returns, although this has gone awry in past weeks because of the sub-prime mortgage crisis in the US.

Historically, this would have been the trigger for a meltdown in emerging markets as happened in 1997 with the Asian crisis.

But emerging markets, especially Asia, are no longer so dependent on the US economy, and this means they are becoming attractive for an investor looking to diversify their international portfolio.

ING Investment Management director, emerging markets equities, Jan Wim Derks said emerging markets now account for 22 per cent of the global economy.

However, emerging market stock exchanges only account for 8.5 per cent of world trading markets.

“That percentage will increase over the next few years, mainly because many local companies will apply for admission to their stock exchange,” he said.

“In many cases this will involve the privatisation of public enterprises, but there will also be frequent floats of private companies that want to fund their future growth externally.

“This is already a common occurrence in Brazil and India.”

JP Morgan Structured Products vice-president David Jones-Prichard said investors do shy away from challenging investments when established markets go though periods of volatility.

“However, we would argue that this is the time to invest, as many countries are delivering very good growth,” he said.

“And in some of those countries, such as China, we would expect that growth to continue for some time.”

JP Morgan recently launched a new fund focusing on countries that are featuring on the new DAXglobal Emerging 11 Index.

The 11 countries are Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam.

Jones-Prichard said the new fund was not investing in Bangladesh, Egypt, Iran or Nigeria because of issues with market liquidity in those countries.

The fund also offers investors some protection from the more volatile nature of these countries by investing a percentage of the fund in US and Japanese companies.

“Emerging markets are a good news story and it is important to add these alternatives to a portfolio,” he said.

“We are now offering a product that is giving investors exposure to markets which are hard to access directly.”

The alternative to this latest emerging market index is the traditionally known BRIC group of countries.

BRIC stands for Brazil, Russia, India and China, although including the latter in an emerging markets index is becoming debateable because of the emergence of China as a major player in global markets.

According to the MSCI BRIC Index, this group of countries have delivered a 12-month return of 16.4 per cent and 40.9 per cent on a five-year cycle.

China alone has returned a 22.4 per cent annual return (12 months ending July 31) and 34.4 per cent on a five-year return.

Double digit returns seem to be the norm for all emerging markets, which is making them attractive to investors as established markets start to head for single digit returns.

Wim Derks said Latin America was a good example, as it has benefited from the global resources boom, unlike Asia, which has become an importer of these raw materials.

“Asia is growing rapidly, particularly China and India, but is short on natural resources,” he said.

“Latin America is very rich in natural resources and will benefit in coming years from huge demand for soft and hard commodities in China.

“During the past six years Latin America has outperformed Asia every single year for this same reason.”