Emerging Markets are currently a hot topic in investment circles. After several of years of negative performance, Emerging Markets bounced back to life in 2016 and many are picking the strong performance to continue in 2017 and beyond.
But first, what exactly are Emerging Markets? There isn’t a clean definition, but generally the term describes a set of countries which display low per capita GDP, high economic growth rates, and financial systems that are not as far advanced as in developed markets (North America, Western Europe, Australasia).
The 10 largest Emerging Market countries are in order: China, South Korea, Taiwan, India, Brazil, Russia, South Africa, Mexico, Malaysia and Indonesia. And don’t think Emerging Markets only consist of small, unknown, risky businesses. They do(!) but they also include some giant, well known global companies such as Samsung, Alibaba and Infosys to name a few.
All up, Emerging Markets account for around 12% of global equity market capitalisation and this, coupled with the high growth rates, presents a strong case for inclusion in a globally diversified investment portfolio.
The positives for investing in Emerging Markets can be summed up as a combination of strong demographic trends (particularly a burgeoning middle class), generally low debt ratios, and cheap company valuations. The biggest risk factors include the uncertain impacts of Trump administration policies (his rush to build his wall is already hurting the Mexican economy), and in-country and in-region turbulence which is always difficult to predict.
Investing in Emerging Markets is not for the faint hearted. The characteristics that make markets fall into the emerging category also lend themselves to high volatility. There have been major surges and declines in the past, and this is most likely to continue in the future! I would recommend investing in emerging markets only for those with a long term investment horizon (10 years plus), and who can stomach the ups and downs along the way.
My preferred method of accessing Emerging Markets is generally a mix (for diversity) of dedicated, low cost index tracking funds, plus using specialised Emerging Market investment funds. Index funds will capture the growth of the sector as a whole, and dedicated fund managers may be able to overweight in countries, industries and companies which will out-perform (the cost being a higher management fee).
Emerging Markets overall increased 10% in 2016, following negative returns in 2013, 2014 and 2015 of -2%, -2% and -14% respectively. In the last 10 years, annual returns have been as low as -53% (2008) and as high as +79% (the year after, in 2009).
The message for Emerging Market investors: buckle up!