Emerging Markets Retain Their Appeal

The Birmingham Post (England), May 6, 2010 | Go to article overview

Emerging Markets Retain Their Appeal


Within any portfolio that contains an allocation to international equities there will be an increasing amount apportioned to emerging markets.

This situation has arisen because most allocations are made upon a market cap-weighted basis and as emerging markets have outperformed developed markets in recent years, their relative weights have increased.

In addition, many asset allocators have tactically over-weighted emerging markets in recent times in light of the fact that, amongst other things, they seem less affected by the credit crisis.

The phrase was a term first coined in 1981 by Antoine W Van Agtmael of the World Bank. Emerging markets, we are told, give us exposure to a debt-free, young, educated and consuming population.

The criteria used to define whether an economy is emerging or developed depends upon who you speak to but GDP (gross domestic product) per head, growth rate and the stage of development in their financial markets are generally accepted measures.

Typically, therefore, a country with low to middle per-capita income is defined as "emerging", but given this constitutes 80 per cent of the global population the easiest definition is perhaps "every market that is not developed".

Emerging markets currently make up just under 15 per cent of the world's stock markets in GBP terms, i.e. within the equity allocation of a portfolio, a neutral position is currently 15 per cent. Getting this allocation right is therefore becoming increasingly important.

There are a number of ways to gain exposure to emerging markets. You can buy individual country funds, the socalled BRIC (Brazil, Russia, India and China) funds, global emerging markets funds or lower charged exchange traded funds (EFTs).

Had you chosen active managed funds by investing in one of the 38 Investment Management Association emerging market funds then over the last six months or one, three and five years not one fund had lost money over any of these periods.

There are, of course, alternative ways of accessing the emerging markets growth story. Portfolios will likely already have exposure to these areas as western companies seek to profit from the increasing affluent emerging market consumer.

For example, Volkswagen - a stock you will often find in a European portfolio - is well exposed to the Chinese export story due to the manufacture of vast numbers of units in China.

Standard Chartered Bank, listed in London but whose majority of assets, revenue or profit come from emerging markets, may well also appear in any UK fund.

Some asset allocators play emerging markets through exposure to their currencies.

While this is principally done through the fixed income markets, it is part of the same story but with a slightly less volatile asset as the heart. …

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