Off beaten track
There is more to emerging markets than just China and India. The good news for investors is that many other markets have been overlooked in the rush to the dominant countries.
For example, one such is the Emerging Europe, Middle East, and Africa (EMEA) sub-sector.This is the huge sweep from Russia in the north, through Turkey and the Levant, the Arabian Peninsula, and on through Africa to the Cape of Good Hope.
This broad sweep contains a population of 1 billionplus (that’s another India or China).
The EMEA area contains 75% of the world’s proven oil reserves, and 97% of the world’s platinum. As China and India continue to industrialise, their demand for oil and other commodities is met from EMEA, in turn allowing its own population to enjoy a higher standard of living.
As with Europe, there comes a point where the price is compellingly good value. Russia is a case in point. While other emerging markets have flown, Russia remains about 40% below its May 2008 peak. Rising energy prices are a big support for Russia, yet its stock market is at a 29% valuation discount to other emerging markets.
Of course there are political risks in Russia. Yet the price does now seem to reflect those risks.
The Fidelity EMEA fund provides access to this huge geographical area, and was up 32% over the last calendar year. The long term potential remains considerable.
Another layer down are the so-called “frontier markets”, relatively unexplored by investors, with huge potential, but they can also be treacherous. The MSCI Frontier Markets index covers 26 countries, and they have a combined economic size 2nd only to China. Like the Russian stock market those of the frontier markets remain about 40% below their 2008 peaks.
The Middle East constitutes a large part of the index, and this is reflected in Franklin Templeton Frontier Markets having an exposure of more than 30% in an area which still enjoys 60% of the global oil reserves.
A frequent investor concern is the quality of management in these nations. Templeton note that increasingly the management teams have been educated at some of the most respected academic institutions of the developed nations.
It is intriguing that with global markets having regained their poise, frontier markets are less volatile than other markets, though admittedly this calm would not survive another sharp global downturn. Right now these are the fastest growing economies of the world, with less debt than both developed and developing economies.
For those that want a bit more in the high risk bucket, both the Fidelity and Franklin Templeton funds provide considerable potential.
(Taken from TopFunds Guide January 2011)