Investors should give serious thought to putting cash into emerging markets, says William Wordie, investment manager at the Nairn branch of stockbroker Redmayne-Bentley
Stock markets across many developed economic regions are at or have reached all-time highs.
It has been widely reported that valuations are at the upper end of the scale, so where do investors find value across the global investment environment?
Emerging/developing markets have been off many investors’ radar since the outflow of billions of pounds last year.
The vulnerability of exchange rates and bond prices was aptly demonstrated by the sell-off, prompted by expectations of a tightening of US monetary policy.
This so-called “taper tantrum” of May 2013 was sparked when then US Federal Reserve chairman Ben Bernanke first broached the subject of reducing America’s central bank bond-buying programme.
It is, therefore, worthy of note that the MSCI Emerging Markets Index is up strongly since its February 2014 low point, and ahead of the developed market index.
But there are still considerable threats looming over emerging markets, which makes them a risky investment.
Professional investors are increasingly concerned about the impact of China on the global economy, with the majority warning that slowing growth will be a major macroeconomic threat.
Yet there are small-silver lined clouds following the latest HSBC/Markit purchasing market index (PMI) for China, which showed the country’s factory sector soaring to an 18-month high.
Improved order flows, particularly from overseas, resulted in HSBCs PMI data for India expanding at its fastest rate since February.
A sustained recovery would improve the lot of UK exporters with significant emerging market exposure – such as Unilever, which reported an improvement in these sales in a July update.
There is still a place for emerging markets in investors’ portfolios, not least as they appear to perform out of step with developed markets – making them a useful investment diversifier.
But investors cannot rely on the blanket assumption that these regions are due to converge with richer peers.
Instead, they need to work out which economies look better-placed to perform and remain alive to a changing outlook.
Investors should also look at the professionally-managed portfolio/funds which have the depth and resources to explore these regions.
Investment trusts have a long-term track record for delivering superior long-term performance in emerging market countries, compared with open-ended (OE) funds such as OE investment companies and unit trusts.
This is due to them not having to buy and sell assets to meet investor demand and also their ability to borrow.
Most emerging markets investment trusts are trading on a discount to their underlying net asset values, a price advantage that may disappear if sentiment in the region improves drastically.
If you’re investing in emerging markets for the first time, then unless you are experienced and knowledgeable it is best to avoid single country funds and spread the risk.
Investors re-entering emerging markets or investing for the first time may be better off drip-feeding money into a managed investment, with an experienced manager.
Because of the risks, emerging markets are mainly suitable for investors with a high tolerance for risk and an increased potential for a loss of capital.
It is always sensible to take a long-term investment view when looking at emerging markets.
But for investors with a higher risk appetite, it is a good time to look at the opportunities available in these countries.
William Wordie can be contacted on 01667 455577.