9th September 2013
Patrick Connolly, certified financial planner at Chase de Vere considers the case for emerging markets giving recent poor performance
Global Emerging Markets funds have had a torrid time in recent years being comprehensively outperformed by their Western counterparts. Over the past three years, the average emerging markets fund has fallen by 2% where as, in comparison, the average UK fund has risen by 42%. In the past six months, those investing in emerging markets have seen a typical loss of some 13%.
It wasn’t so long ago that Western economies were considered to be ‘on their knees’ and investors were strongly encouraged to look toward developing nations to benefit from any real prospects for growth. So what has gone wrong and should investors be avoiding the emerging markets?
There is a combination of factors which have led to this poor performance in emerging markets. Subdued economic data and earnings weaknesses have helped to instill a lack of investor confidence, which has been further hindered by a strong US dollar. There are real concerns that the, seemingly imminent, scaling back of Quantitative Easing in the US will further augment these problems.
Investors are also concerned about the additional ongoing risks of investing in emerging markets. These include political risks, sub-standard infrastructure and poorer levels of corporate governance, meaning you can’t always believe what is written in company accounts.
However, despite these concerns, the long term growth story in the emerging markets remains largely intact. The International Monetary Fund (IMF) still expects emerging economies to grow by 5% per annum or more in the coming years and more of these economies will benefit from greater domestic consumption over time as their populations have increasing levels of disposable income.
The recent falls have made stock valuations much cheaper, which could potentially create buying opportunities. This doesn’t mean that investors should rush into emerging markets. For the vast majority of investors it should still make up a significantly lesser weighing in their portfolios than their exposure to Western markets.
We are likely to see continued high levels of volatility and potentially further short term losses in emerging markets as stock prices often over-react by rising too much during the good times and falling too heavily in the bad ones.
For those looking to invest in emerging markets, and willing to accept the risks, then making regular premiums should be a sensible way to negate the risks of market timing. We also strongly support using broad based emerging markets funds, rather than country specific funds in order to diversify risks.
Existing investors should review their holdings to make sure they don’t have too much, or too little invested in the region, remembering that it is often the wrong time to come out when losses have already been made.