As equities lose their attractions during the global economic and stock market downturn, investor...
As equities lose their attractions during the global economic and stock market downturn, investors may feel the extra risk encountered by investing in more volatile emerging markets may not be sufficiently balanced by the potential rewards on offer.
Yet there are fundamental reasons for investors to believe there are higher than average growth prospects from investing in emerging markets, particularly those in the Asia Pacific region. The first of these is the growing domestic consumption in the region, which reduces the dependence on exports and should help to fuel growth.
Second, Asian emerging markets are still attracting new investment from Western and Japanese companies, particularly those seeking to cut costs by outsourcing manufacturing and services. China leads the way in the area, but its ability to provide a low-cost manufacturing base has undermined the competitive position of its neighbours.
Nevertheless, China should ultimately act as a positive force by encouraging other economies in the region to diversify into greater value-added industries.
Third, the region displays many strong company balance sheets and the corporate governance has improved, while developed economies have exposed the likes of Enron and WorldCom.
Fourth, since the last recession (1997/98) when the banking sector was hit hard, confidence has returned.
Fifth, many of the region's emerging economies are running current account surpluses so supporting currency strength and lower interest rates. Inflation has been brought under control, a factor that has dogged many emerging markets over the years. And, finally, the region's GDP growth forecast of 4% a year is substantially higher than the global economy as a whole at 2.7% per annum.
Of course, emerging markets are ultimately dependent on the strength of the global economy and, as in developed markets, uncertainty plays on the minds of overseas' investors, which dampens demand.
Countering this is the demand for many Asian emerging markets stocks, which are well supported by a strong domestic saving and investing culture. This helps to support liquidity and underpin demand for shares.
According to HSBC, since 1996 the worst stocks in the best emerging market have outperformed the best stocks in the worst market every year. The variance of pace of economic growth is striking. Korea is the extreme example: while South Korea has effectively emerged and is set to join the G7 (making it the G8) and has a pro-business government, the regime of its northern neighbour has restrict- ed economic growth.
In a rare period when emerg- ing market funds investing in the Asia Pacific region top the league tables, investors are nursing losses in stock markets just about everywhere else in the world.
While recent performance has been stronger than that of developed markets, the valuation of many Asian emerging markets is still lower than the more developed economies. It is now time to consider whether these emerging markets deserve such a low rating compared with those of the US and major European markets
There are low relative valuations.
Strong company balance sheets.
Healthy domestic fundamental.
Set up Vanguard in 1975
‘In the know’
Owen to pay £3m
Lasting power of attorney
Three risk profiles