Sunday, December 30, 2007

Should you be Investing in Emerging Markets?

The global growth story was a recurring theme in 2007. BRIC (Brazil, Russia, India and China) investing, especially in the latter two markets has been headline news frequently. Businessweek explored the Exponential Power of 'Chindia' and the possibility of this partnership leading many global markets in the future.

Analyst expounded the "decoupling" thesis (decoupling assumes the rest of the world no longer catches a cold when the US sneezes. It merely offers an indifferent gesundheit and carries on its way) which ended up casting emerging markets as a defensive play. The more aggressive are also dabbling into "frontier" markets with their phenomenal returns.

"Since January 2000, the frontier markets have returned an annulized average of 24%, compared with 12% for emerging markets and 3% for developed ones."
- Merrill Lynch Research Note
The returns hinge on a variety of risks not unlike what is transpiring in Pakistan. Geopolitical unstability has the potential to impact any market in a hurry. Plus there is some concern that emerging stock markets may have reached giddy heights and a steep correction is but inevitable. But some disagree with this notion.

"The risks are overrated" says James Harmon of Caravel Management. Caravel has 34 positions in 16 countires, with 10% of its assets in Pakistan and 2% in Zimbabwe, where inflation tops 500,000%.
In my view emerging markets should be part of an aggressive portfolio. There may be a bubble and possible retraction due to global events but the global growth story is for real. Emerging countries are moving from suppliers to consumers and that is a huge shift in world economy.

"There is a fundamental shift occuring in the world's center of gravity"
- Mark Renton, Citigroup's head of investment banking for Asia Pacific
When you review stock market performances in 2007, investors in emerging markets were handsomly rewarded. In dollar terms, Brazil returned 75.7%, India 74.7% and China 63.3% compared to the partry single digit returns in the US equities market.

With the US economy teethering on the edge of recession, the credit crisis and housing slump expected to continue into 2008 and maybe extend beyond that - the case for having part of your portfolio in emerging market stock is strong. Investment choices include global companies with a significant emerging market footprint (General Electric, Pepsi, McDonald's, Caterpillar, Cicso are all positioned to exploit the global growth spurt), emerging market index (like MSCI Emerging Market Index) based ETFs and mutual funds.

"As investors largely turned their backs on funds exposed to developed markets,
net inflows into emerging markets equity funds hit an 85-week high of $5.5bn
in the fourth week of September" Financial Times

Fluke or reality?
With India and China growing at 9-11% and sporting populations (customers) of more than a billion each - a prudent investor would be remiss in ignoring this investment opportunity. Individual investors should review their risk/reward appetite before investing in emerging markets but to not have any direct stake in this phenomenal growth story would surely be a mistake.

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