Emerging markets are back and no longer bit players in the road to global prosperity ' in fact, you ...
Emerging markets are back and no longer bit players in the road to global prosperity ' in fact, you are probably already exposed to them.
It has been true for some time now that all our lives are very much affected by what goes on in the developing world and particularly in Asia. The major reason for this is trade. We buy ever-increasing amounts of goods from Asian exporters ' Mexicans also if you are in the US ' and as time progresses they will probably start to sell us more services too aided by the distribution power of the internet.
One of the biggest factors in keeping inflation so low in the developed world during the past 10 years has been the falling price of imports from developing countries. This has taken the sting out of the recent global slowdown for consumers in the developed world because it has enabled central bankers to lower rates to extremely low levels without really having to worry about inflation. Were these countries to fall prey to the sort of political instability affecting parts of Africa for example, this would now represent a pretty serious global economic problem and this was not the case even six years ago during Asia's financial crisis.
The direct impact of the developing world on our standard of living is not restricted to the goods and services we buy but also through the goods and services that our companies buy. As our banks move their IT departments to India, our retailers source cheaper garments from China and our phone companies get infrastructure at a fraction of the cost of three years ago, their profits rise and they can pass on some of the savings to their customers. This is good for our pension funds and also for us again as consumers.
The pervasiveness of the developing world in our economic lives immediately suggests three things from an investment point of view. First, you are already exposed to what is going on in emerging economies through your UK equity portfolio because the companies in these portfolios are sourcing more inputs from the developing world. This exposure will increase as global trade rises.
Second, if you are going to invest in emerging markets proper it makes more sense to buy companies leveraged to emerging market consumers. They are taking jobs from developed-world consumers, they are generally younger and therefore at an earlier stage of their consumption profile and encouragingly most do not have the same level of debt as their developed world counterparts.
Finally, recognise even if you do not want to invest in emerging economies directly, companies in your developed world portfolios will in a bid to outgrow their competitors and your exposure will therefore increase. On official numbers, the main developing economies together already constitute a significant part of global demand (China, for example, is similar in size to the UK, Korea and India about half of this size). They are, of course, much larger on an unofficial sector basis and are growing rapidly. You are entitled to worry whether your UK companies will overpay for this growth ' witness the typically suicidal dash by all global car companies to gain a foothold in China's market. BP paid good money for Russian oil reserves earlier this year after the valuation of Russian assets had gone up tenfold. A few months ago, the chief executive of a large UK-based bank quite rationally stated he would not buy into Germany because government involvement in the financial sector depressed returns. Almost in the same breath he then suspended these analytical faculties by committing to China where, of course, the government also controls most of the banking sector with similar results to Chinese bank profits as happens in Germany.
Owners of emerging market funds might see many of the companies in their portfolio purchased at decent premiums in the coming years. The past two years have shown that developed world markets can be as volatile as emerging markets and that the real risk to investors always stems from owning overvalued assets rather than where those assets are situated geographically. The world is too far down the road of global trade and specialisation to stop now and everyone benefits from the process. The risks and rewards of doing business in the developing world are increasingly being assumed by all of us whether we are aware of it or not and buying emerging markets funds can be a useful way to benefit from these powerful trends.
Joined as head of strategy, multi asset, in June
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