Emerging Markets - investors still underweight
Never have we known such divergent views on nearly every asset class, and emerging markets are no exception. They are either good value and expected to explode upwards, or are already hugely over-valued and about to fall sharply, with China in the vanguard.
So how should you respond?
Identify the most compelling long term trends and find the most painless way to gain an exposure. Huge they might be, but China, India, and Brazil are still “emerging”. This can be illustrated in a range of ways, focussing here on China:
- Electricity use per head in the US is 13,582Kwh. It is 6,185Kwh in the UK and 8,220Kwh in Japan. But in China it is just 2,041Kwh.
- By 2035 the Chinese economy might be 17 times as big as it was in 2004 (according to Goldman Sachs)
This economic transition will not be without turbulence, but there is a marked determination on the part of the Chinese Government, evidenced over years, and most recently with their huge and rapid response to the sharp slowdown in Autumn 2008.
Shorter term factors can also drive their stock markets somewhat higher. Many analysts expect global interest rates to stay lower for longer, as central bankers and politicians fear making the mistake of the 1930s, increasing rates too soon. That being the case there will remain a lot of cash washing around the globe looking for a home.
We believe a disproportionate amount of this money will find its way to emerging markets. With the developing world now responsible for just over half of global GDP, the vast majority of institutions and global funds will find themselves having far too little in emerging markets on a GDP-weighted basis.
It’s not all about China. Regular readers know that our favourite country is India, followed by Brazil. And emerging markets as a whole came of age in 2008 and 2009. As Barclays Capital put it:
“the ability of EM to weather the most severe financial crisis in seventy years dramatically changes the nature of the asset class”
dips, drips and Basics
Longer term investors will ideally want to buy on dips (the markets aren’t cheap now) or drip in each month, and let the volatility work for you as you average out your buying price over time.
The Axa Framlington Emerging Markets fund continues to be recommended, along with the Mark Mobius team running Franklin Templeton Global Emerging Markets.
Another way to access the positive trends in emerging markets is through M&G Global Basics, an old favourite that we christened “the thinking mans way into emerging markets”. In essence it invests in companies that produce the goods or services needed by China and other emerging markets. The skill of the manager Graham French is in identifying shifting trends in business or consumer trends, and uncovering companies that will exploit this evolution, which he calls the “curve of economic development”, with commodities at one end, and luxury goods at the other. This fund represents a conservative, but still very profitable, way into emerging markets.
(Taken from TopFunds Guide January 2010)