In the recent state opening of Parliament, the Queen announced: “My Government looks forward to an enhanced partnership with India.”
Strengthening trade links with emerging market countries makes good sense when you consider this is where the fastest-growing economies lie.
The resurgence of China (and to a lesser extent other emerging economies) has been transforming the global economic scene and there are some who believe over the next few decades India may in fact surpass China.
To add a little context, the UK currently exports more to Ireland than it does to Brazil, Russia, India and China combined, so there is certainly plenty of scope for better trade links.
In the investment world however, many of us are already there. Baillie Gifford has been investing in emerging markets equities for many years. You may remember last December’s AIC poll of fund manager predictions in which emerging markets was tipped to be the top-performing region for 2010, winning 35% of the overall vote. If we look at one-year performance of world indices to end of May 2010, we see this prediction could prove to be quite a savvy bet.
To make some sense of all of this, we should realise the fundamentals of many emerging markets have improved gigantically over the last few years compared with the West. Their general long-term growth prospects will not be hindered by the negative effects of massive debt. Their demographics are much more attractive than those of the more developed economies and in many countries there is a rapidly burgeoning middle class.
It is true these markets are not immune from economic shocks and they can be volatile in nature. Just look at the recent general strike we saw in India, which was called in response to rising fuel prices. But for many investors, average growth rates of a little over 6% from emerging markets in 2011 are quite attractive compared with just over 2% from the developed world.
The term emerging markets has colloquially, and somewhat pejoratively, been used to denote high risk and a degree of economic backwardness.
We think it unwise to think of countries like China and Brazil (both have emerged) as high risk when their balance sheets, trade positions and financial structures appear so much more solid than our own. It is also ironic one of the few countries in recent years to have been reclassified as ‘developed’ from ‘emerging’ is Greece.
We continue to believe the changes taking place in emerging markets are being underestimated and we remain enthused by the number of exciting investment opportunities in this area.
James Budden is marketing director, wealth management at Baillie Gifford
