Last week’s news that the Chinese economy continued to power through the global economic crisis, with growth of 10.7%, adds weight to those who argue for a greater weighting to the country and emerging markets in general.
However, most investors need little convincing emerging economies offer the potential for
strong returns.
Writing on page 47 of this issue Mark Mobius points out that in the first 10 months of 2009, emerging markets recorded nearly $67bn in net inflows, nearly 25% more than the record-high $54bn registered in 2007. In the past 15 years, net inflows have totalled more than $145bn.
The momentum is clear for all to see.
Investors are well aware they should expect a bumpy ride, but the long-term growth story is compelling.
The sector is also a great case for active management. Index hugging, by using instruments like ETFs, in emerging markets has the potential of leaving investors over-exposed to a couple of export-orientated giants while missing the domestic growth stories.
The biggest emerging market, China, now finds itself the subject of a number of fund launches. Antony Bolton may be the highest profile manager to try his hand in the region, but Martin Currie’s announcement in this week’s issue shows fund management houses have been planning to exploit opportunities there for some time.
While volatility warnings are mandatory with these funds, there is also a very real debate as to how long the Chinese economy can realistically keep booming, and what the implications of serious bust would be.
Speaking at a conference last week Cazenove’s CIO Richard Jeffrey pointed out that while China had exceed the expectations of many economists the government was now tightening credit conditions, after unprecedented stimulus.
And while there is still plenty of room for growth in China it is unlikely it will set some new kind of paradigm, where an economy grows rapidly, without a serious hiccup, forever more. After all not even Gordon Brown could end the cycle of boom and bust.
Google’s recent spat with the Chinese censors is also a timely reminder to investors it is still ultimately the Communist Party which decides what its people can and cannot see and do.
In the area of emerging market debt (see page 24) some managers warn there is every sign a bubble may be building and all the easy money has already been made in the sector. Yet, there is no doubting from a fiscal perspective many emerging markets look far better run than any of their mature peers.
As Paul Crean, partner at asset manager Finisterre Capital, says: “This crisis has proved these countries are in much more robust positions than a lot of countries in developed markets. UK and Ireland expected to run deficits of 12.5% of GDP, and at the same time we are asking, will Brazil run a fiscal deficit of 2.2% or 2.3%.”
Finally, the time when the term “emerging market” becomes utterly redundant for many countries must surely be soon, and along with it some of the risk premium investors demand to allocate their money in those markets.
