The allure of emerging markets can be hard to resist for investors who think they can get rich quick and are tempted by tales of double-digit growth in developing countries that turn into high-tech powerhouses overnight. Yet the truth is often far less exciting.
Economic booms rarely translate into bumper investment returns. Stock markets in emerging markets fell on average by more than two per cent last year, and over a decade returns are up less than 12 per cent.
In comparison, the FTSE All-Share Index went up 17 per cent last year. But there are rewards if you take a sensible approach and are prepared to wait.
Kathryn Langridge, manager of Jupiter Global Emerging Markets fund, says that although strong economic growth does not mean investors automatically make money, it is an indication that some share prices are likely to rise.
She says: ‘There are structural challenges for fragile economies such as Brazil, India, Indonesia, Turkey and South Africa, which all have big debts. But these are slowly being tackled and there are opportunities for investors who pick the right stocks. The key is to be patient and take a long-term approach.’
Langridge believes that a rising wave of middle-class consumers in emerging economies such as China and India will play a key role.
The growth in domestic demand for luxury brands in sectors such as electronics and clothing, plus demand for better banking and healthcare services, will be reflected in higher share prices for companies operating in these areas.
Her top fund holdings include South Korean firm Samsung Electronics – the world’s biggest maker of mobile phones – and Abu Dhabi-based private healthcare provider Al Noor Hospitals.
Langridge has 21 per cent of her portfolio in consumer services and 15 per cent in technology. She also says the latest figures from the World Bank support optimism for the emerging market sector. It forecasts 5.3 per cent growth for developing countries this year, more than double the 2.2 per cent expected for developed nations.
Allan Conway, head of emerging market equities at top investment house Schroders, also believes that emerging markets offer investment opportunities. He says: ‘The so-called BRIC nations of Brazil, Russia, India and China lie at the heart of the emerging markets investment story. So any investment should naturally have exposure to companies based in these countries.
‘But don’t be lured in by other acronyms, such as MINT – Mexico, Indonesia, Nigeria and Turkey – as these are little more than marketing gimmicks.
‘By not being country-specific and putting your money into a broadly invested emerging markets fund you can spread the risk. The managers of these funds have freedom to stock pick across the globe.’
Bright future: A rising wave of middle-class consumers in emerging economies such as China and India will play a key role
Conway believes the financial sector is one area that could do particularly well in the next couple of years as more people open bank accounts, save and take out loans and mortgages. More than 28 per cent of the fund he runs – the £700million Schroder Global Emerging Markets – is in financial firms. Top holdings include Brazil’s Itau Unibanco, China Construction Bank and India’s HDFC Bank.
Investors have a number of emerging market opportunities, such as exchange-traded funds, investment funds and investment trusts, to choose from. For example, there are 70 global emerging market investment funds as well as those concentrating on specific emerging markets, such as China and India and regions such as Asia.
Some funds also specialise in delivering income from a basket of emerging market shares. Investment broker Bestinvest has Lazard Emerging Markets and JPMorgan Emerging Markets among its recommended funds.
Funds with an emerging markets theme that appear on Hargreaves Lansdown’s ‘favourite’ funds list include Aberdeen Asia Pacific Equity, First State Asia Pacific Leaders, JPMorgan Emerging Markets, Jupiter China, Newton Asian Income and Newton Emerging Income.
Deutsche Asset and Wealth Management has just launched a low-cost exchange-traded fund that will invest in the shares of Chinese companies listed on the stock markets of Shanghai and Shenzhen.
Looking ahead: Investor David Messiter with daughters Lila, and Amelia, 18 months
David Messiter, 40, has about 20 per cent of his investments in emerging markets. His holdings include Fidelity funds China Focus, Latin America and India Focus as well as Neptune Russia and Greater Russia.
The technology company manager, of Wivenhoe in Colchester, Essex, is married to Tui, 37, with daughters Lila, 4, and 18-month-old Amelia. He says: ‘It is the investment potential that excites me. In work I come across some great software developers from India – they put a lot of value on education and hard work. So I decided to put £5,000 into Fidelity India Focus fund five years ago.
‘I am not expecting to get rich quick but it is a long-term opportunity. It is now worth more than £8,000.’
Mark Dampier, head of research at leading broker Hargreaves Lansdown, agrees that spreading risk across emerging markets is a good idea. He also recommends that emerging markets should typically comprise no more than 10 per cent of any investment portfolio.
He says: ‘Every dog has its day and that goes for individual countries within emerging markets. But you are usually better off spreading risk with a globally invested emerging markets fund.’
Global emerging market funds can have exposure to shares in more than 20 developing nations. Garry White of broker Charles Stanley says: ‘There are a total of 2.5 billion people living in China and India – numbers you simply cannot ignore as an investor. Yes, the global economic downturn has hit emerging market economies and their stock markets, but the good news is that valuations on stocks are now lower than before the 2008 financial crisis. That suggests a long-term buying
Going east: Kyriacos Nicola and his wife Brenda
China is the second-largest economy in the world behind America. Its growth is now attracting the attention of many UK investors. Retired insurance company manager Kyriacos Nicola, 66, has seen £1,500 that he invested in the First State Greater China Growth fund more than double in value to £3,800 since 2008.
Kyriacos, of Southend-on Sea, Essex, who is married to Brenda, 67, says: ‘I don’t just go with the flow. Emerging markets have fallen out of fashion in recent years and for me this makes it a good reason to invest.’
First State Greater China Growth has generated returns of 159 per cent in the past five years. Top holdings include property developer Cheung Kong Holdings, technology firm Taiwan Semiconductor Manufacturing and energy firms China Oilfield Services and ENN Energy Holdings.
Jason Hollands, managing director at broker Bestinvest, says: ‘China is at an economic crossroads. It got reliant on exports to build its economy but it has now realised it must change direction. There is a need to build a vibrant service sector and focus on the strong domestic demand emanating from a young workforce with money to spend.
‘The transition will take a few years so investors may need a thick skin and a long-term outlook. But even without the recent double-digit growth, China looks healthy, with the economy forecast to grow by 7.5 per cent this year.’
Not all investors rely on stock market-based funds for making money out of developing countries. Instead, some are turning to property.
Andrew Savage, 34, from Sheffield, hopes to profit from the housing shortage in Brazil by investing in a new-homes project overseen by London-based developer EcoHouse.
The firm is building social housing in a Brazilian government-backed plan to get eight million people out of the ‘favela’ slums.
Andrew, a telecoms manager, is married to Katie, 32, and is now based in Dubai.
He says: ‘Investing in a developing country seems a bit scary but you can get a lot more property for your money in countries such as Brazil than you can in Britain, and there is the added bonus of knowing you are also helping those in desperate need of housing.’
Andrew has invested £23,000 into social housing accommodation in the north- east coastal town of Natal – enticed by the lure of a projected 15 per cent profit plus his initial investment back after one year when his off-plan home is sold. But returns are not guaranteed.
EcoHouse founder Anthony Emery says: ‘Brazil is a land of opportunity, but bureaucracy can bog you down. We are providing much-needed housing that is welcomed by the government.’
The Brazilian economy grew by about 2.5 per cent last year and is hosting football’s World Cup this summer, followed by the Olympic Games in 2016.
Darius McDermott, managing director at broker Chelsea Financial Services, says: ‘The Brazilian stock market went up by 350 per cent in the Noughties as it got a grip on inflation and interest rates. ‘But investors cannot expect a repeat performance. Although a sporting feelgood factor could lift the economy’s fortunes, a stock market such as Brazil’s only really suits brave investors.’
McDermott warns against direct investments either in property or a fund targeting Brazil. He believes that a collective emerging markets fund, with limited exposure to Brazil, is a more sensible option for investors.
Final Thought : With many recent overseas property investments ending in a lawsuit, EcoHouse are a refreshing change bringing that security and professionalism to a once risky investment sector….