By Mark Mobius, a fund manager at Franklin Templeton Emerging markets provide important alternat...
By Mark Mobius, a fund manager at Franklin Templeton
Emerging markets provide important alternatives for investors and there has been a significant increase in funds being channelled into the asset class.
With the development of formal securities markets, equity legal structures and trading systems in more and more emerging market countries, international equity portfolio investing has become more identified with investing not just in developed countries but also in emerging areas.
It is generally accepted that emerging markets encompass Latin America, Africa, Asia (ex Japan, Australia and New Zealand), Eastern Europe and Russia. In total, they make up some 85% of the world's population. However, their combined GDP is only 25% of the world total. They are, though, growing faster than developed countries.
Their combined average annual growth rate of 5.2% over the past 10 years is more than double the 2.5% growth rate of developed countries. Economists expect this trend to continue for the foreseeable future.
Of course, not all emerging economies are growing fast and some, such as Argentina and Venezuela, are shrinking.
Despite overall rapid growth, many emerging markets companies are undervalued compared with peers in developed markets. The average P/E ratio for the emerging markets is 10.2 compared with 18.6 for the US and 19 for the EU.
Emerging markets should see positive economic performances as they reform and liberalise their economies. In some countries, privatisation not only frees up the economy but also increases investments.
Freer markets and an easier flow of investment capital are making emerging markets more attractive to foreign investors. In recent years, emerging countries have built up massive currency reserves to ward off the possibility of a repeat of the Asian crisis of 1997-98.
Although there is no shortage of reasons to invest in emerging markets, there are concerns associated with the asset class. Many investors believe emerging market investing involves more risk than developed markets. However, the Enron and WorldCom fiascos in the US have shown investors developed markets are not necessarily safer than emerging markets in this regard.
Controlling shareholders and managements have been known to violate minority shareholder rights by taking measures to tighten their control. This may involve an unlisted holding company taking advantage of the publicly-listed subsidiary.
Controlling groups may also become involved in criminal behaviour for personal financial gain. However, as globalisation is opening up more and more markets and efforts are being made to attract foreign investments, an emphasis on corporate governance is increasing.
Despite volatility in some emerging markets, others can record robust performances. For example, while Asian and Latin American markets fell as a result of events such as the Asian crisis of 1997 or debt problems in Argentina, regions such as Eastern Europe and South Africa recorded positive performances.
Emphasis on corporate governance increasing.
Positive growth in many markets.
Many stocks are undervalued.
Many emerging markets remain volatile.
Problems persist in Argentina.
Lack of corporate visibility .
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