Beware the Siren Call of Emerging Markets
Knight, Julian, The Independent on Sunday (London, England)
The story of emerging markets is a seductive one. They are go- get-'em economies, growing at a staggering pace, set to speed past the moribund West in little over a generation. What's more, the main emerging markets of Brazil, Russia, India and China (Bric) have massive populations, growing middle classes and, crucially, young demographics. We all know by now the narrative, and for investors, even usually cautious ones, emerging market fund investment seems the ultimate no-brainer. No wonder the Investment Management Association reports that emerging markets are currently one of the most popular areas for private investment.
But as the deadline for investment in this year's Individual Savings Accounts draws ever closer - investors have until 5 April to put up to 10,200 in an ISA and secure the tax-free status of any growth - there is a note of real caution that needs to be struck. Not all, it seems, is plain sailing in emerging markets and investors should be acutely aware that many of problems blighting the West at present are at play in the emerging economies, potentially putting investment at risk.
Rising inflation is one of the key areas of concern. "Inflation is the price of strong economic growth and the chasing of commodities," said David Kuo, a director of investment information site Fool.co.uk. "China's economy is growing at around 9 per cent - its inflation rate is about 5 per cent; India is growing at about 8 per cent - its inflation is 9 per cent. Provided businesses can raise prices in line with inflation then profit margins and investor returns can be protected."
And inflation may not be a short-term challenge to emerging markets. Commodity price inflation is, according to Phil Poole, HSBC's global head of investment, likely to be the "economic story of the next 10 or 20 years. The effects on personal incomes in emerging market economies are greater as food and fuel take up 60 per cent of everyday spend."
Higher petrol and, in particular, food costs are fuelling political instability in the Middle East and potentially beyond, and this in turn can have a major effect on share values.
Turkey, an emerging market star, has, for instance, seen nearly 20 per cent wiped off its stock market as a consequence of the Arab Spring political instability. …