Did you know that the Russian stock market grew by a staggering 89.56% over the last year? Or that the Egyptian stock market grew by a no less impressive 57.98% a year over the last five years? Performance records in the emerging markets of Eastern Europe, Asia, the Middle East and South America have been nothing short of spectacular. Furthermore, an impressive number of companies in these emerging markets are rapidly turning themselves from regional success stories into huge multi-national conglomerates. As the UK’s Investors Chronicle recently reported: ‘If you are looking for decent, relatively cheap, relatively safe stocks you no longer have to limit your choice…the world is quite literally your oyster. ’
Does it make sense, however, for a small, cautious, private investor to put his or her hard earned cash into this sector? For those who have already built up assets closer to home the answer could well be ‘yes’. We live in a global economy, stock markets historically outperform all other forms of investment and one of the golden rules of making money is diversification. So, now could well be a very good time to start dipping your toe in rather more exotic foreign waters.
Why do emerging markets offer such good potential? I have already mentioned globalisation and its effect should not be underestimated. The developed world depends for its own expansion on products and services purchased from the emerging economies. Growing political stability, developing equity markets and rapidly rising commodity prices all add to the attraction. It should also be noted that many companies are now listed not only on their local exchanges but also in London and New York.
What are the pitfalls? It is generally said that dips in the world’s major stock markets spell long-term bad news for emerging market stocks. This may have been true in the past, but is much less relevant nowadays. Many of the hotter markets, which suffered bad falls last May, have already bounced back. Anyway, it is a great mistake to lump all emerging markets together. Each one needs to be considered on its strengths and weaknesses, just as individual stocks do. There is huge difference between, say, Thailand and Brazil in the same way that there is a huge difference between, say, Delta and Ryanair.
How can you buy a little piece of the emerging market action? If you are willing to do the research you could invest directly. A good source of information is Boston Consulting’s RDE 100 list. The initials ‘RDE’ stand for ‘Rapidly Developing Economies’ and the list comprises 100 firms from developing economies that are leading the pack when it comes to globalising their businesses. The list is to be found at www.bcg.com. Some are already global players including heavyweight names such as Mexico’s CEMEX (one of the world’s largest cement makers); Hong Kong’s Johnson Motors (which has 40% of the global market for small electric motors); and Brazil’s Embraco (which as 25% of the global market for compressors). Others already enjoy national or regional dominance and are now poised for global growth. They include India’s Tata Motors; Turkey’s consumer goods firm, Vestel; and Egypt’s Orascom Telecom. Sixty of the firms on the list are, by the way, publicly quoted. If you would prefer less direct involvement there are plenty of managed funds to pick from. The top performer for the last five years has been Credit Suisse European Frontiers, which is currently showing a 292% gain.
Justin Power http://www.powerreport.net