Fund manager Bryan Collings of Ignis HEXAM Global Emerging Markets has listed 10 reasons why it is important for investors to increase their exposure to emerging markets.
He says that most UK and US investors have only around 5% exposure to emerging markets within their portfolios, despite sound structural drivers and impressive market performance in these developing markets.
He went on to say ‘It makes no sense to have so low an allocation to such a large and important asset class,’.
Below are Collings’ 10 reasons for investors to increase their exposure to emerging markets.
1. Drivers of global growth
Taken together, the emerging markets, including the Middle East, comprise the largest economic bloc, accounting for around 36% of the global economy in terms of gross domestic product (GDP). According to the International Monetary Fund’s latest estimates, China is the single country that contributes the most to global economic growth, with Russia, Brazil and India also among the top eight contributors. Higher growth tends to lead to higher equity market returns.
2. Favourable demographics
Emerging markets represent approximately 75% of the world’s land mass and house more than 80% of the global population. Most of the future population growth is expected to be in emerging markets, where the population is expected to grow five times as fast as in developed countries. This means that emerging markets tend to have a high, and growing, proportion of young, skilled people.
3. A high and growing number of consumers…
By 2030, more than one billion people in emerging markets are forecast to join the ever-increasing consumer middle class. Currently, personal consumption in China accounts for just 37% of GDP, compared with more than 60% and 70% in Europe and the US respectively*. There is, therefore, scope for significant further spending.
*Source: World Bank, 2009
4. …with money to spend
The world’s savings are concentrated in emerging markets, which hold 75% of the world’s total foreign exchange reserves. Emerging economies are less indebted than their developed peers at a country, company and individual level. Importantly, banks in emerging market countries have emerged from the recent credit crisis relatively unscathed, as they generally had little or no exposure to the ‘toxic assets’ associated with the sub-prime mortgage fallout in the US. This provides strong foundations on which to build future growth.
5. Reduced dependence on developed economies
Emerging markets have a wealth of natural resources, including more than 90% of oil and gas reserves, 70% of coal reserves and 60% of copper, nickel, iron ore and bauxite reserves. ‘South-south trade’ (not involving developed economies) has proved resilient and emerging markets are fast becoming the largest commodity consumers as urbanisation (linking urban and rural populations) continues apace.
6. Equity outperformance
Emerging market equities have outpaced their developed market peers both since the launch of the MSCI Emerging Markets Index in 1987 and over the past ten years, during which they have outperformed by an impressive 166%*.
7. Superior profitability
High GDP growth typically translates into higher return on equity (ROE). As shown in the chart below, the profitability of emerging markets companies is superior to that of companies in developed markets.
8. Similar volatility; higher returns
Investment in emerging markets is often viewed as ‘more risky’ than developed markets. Over the past ten years, however, a blended portfolio of emerging markets and developed markets exposure would have demonstrated a similar level of volatility, but providing far superior returns.
9. Declining volatility
Volatility within emerging markets has actually been trending lower for years, and has consistently remained within a narrower range than both the FTSE All Share and S&P 500 indices. In the recent crisis, emerging markets’ volatility peaked at a lower level than developed markets’ volatility. Subsequently, it has dissipated more quickly.
10. Market capitalisation
Despite their dominance in terms of world population, land mass, foreign exchange reserves and GDP growth, emerging markets have just 10% of world equity market capitalisation. This has been growing over the past decade, and with it equity market returns have risen. This trend is likely to gather pace over the coming years.
The above should not be considered as advice as it is produced for your information only, but if you would like to discuss your investments please give us a call.