Less risk from emerging markets

Global emerging markets are expected to continue to grow unabated alongside a decline in volatility as emerging nations become more established and less reliant on the United States as an export market.

Schroders’ global head of emerging market equities Allan Conway said in the past, emerging market growth had been almost entirely dependent on the global market economy, but this was no longer the case.

He said some of the emerging markets, particularly India and China, had grown large enough to become self-sustaining.

Additionally, in 2004 for the first time, exports from emerging Asian economies to China had exceeded exports from those countries to the United States.

Conway said structural changes in emerging markets, such as single digit inflation, current accounts that are in surplus and undervalued exchange rates had also assisted by improving the credit ratings of many emerging market economies.

He said across the board there had been reductions in risk and volatility, except in a few notable cases such as Venezuela, with the result that many emerging economies were now stronger than economies in developed nations.

Conway said equity prices in the emerging markets also compared favourably with prices in developed countries and forward price earnings ratios in emerging markets were at historically low levels.

Equities in the emerging nations were also reasonably priced compared with the size of the economies, he said.

However, Conway stressed the importance of country selection and diversification within the emerging markets.

“Getting the country right, even if you are the worst stock picker in the world, you are still going to do better than a good stock picker that chooses the wrong country,” he said.

Conway said the BRIC countries (Brazil, Russia, India and China) in particular had displayed stellar growth in the past year, accounting for 31 per cent of total global economic growth.

He said the BRIC economies were predicted to generate more than half of the world’s economic growth within the next 15 to 20 years.

Unlike emerging nations in the past that developed on low-end manufacturing, China and India have highly educated labour forces and have based their growth on skilled industries, China with high technology and automotive manufacturing, and India with software development.

Conway said the low correlation between the BRIC countries provided a level of diversification that would be inherent in BRIC funds.

Lower volatility coupled with high growth would make emerging market and BRIC funds an increasingly attractive option for long-term investors such as superannuation funds, according to Conway.