The emerging economies will keep on growing through the 2009 recession, and their savings will finance the eventual recovery. But does it still make sense to invest there?
The great investment story of the new millennium has been the emerging economies. Led by China, India, Brazil and Russia, they’ve seen economic growth rates soar to 6-10%.
Hundreds of millions of people have moved from dollar-a-day subsistence to what qualifies as middle-class in these poor countries: a steady job, home, clean water, ability to pay for school fees and medicines… and dream about owning a car.
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Changing picture
From 2000 to 2008, it seemed a tidal wave of prosperity was spreading across the world, and funds investing in these countries produced stellar results.
Between January 2004 and January 2008, the average global emerging market fund turned £1,000 into £2,500, while a UK investor was lucky to get £1,500.
But since the credit crunch struck the picture has changed. At first, analysts hoped that emerging markets would escape the effects, since they had no banking or debt bubbles.
Savings rates are high
In most emerging economies, savings rates are high – as much as 30% of incomes – and there’s little if any mortgage or consumer debt. But that hasn’t stopped their financial markets seizing up and melting down.
Two things have happened to send markets into a tailspin, with overall declines in stock markets now reaching 50-60%.
First, it’s become clear that exports from emerging economies are shrinking fast as the recession bites in the US and Europe. So many companies are going to struggle, just as they are in the developed nations.
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Sell-off sends markets tumbling
Then in October, in an even more scary development, share prices plunged in all the emerging markets as banks forced investors who’d borrowed to finance their investments to repay their debts.
Hedge funds, under the cosh for poor performance, saw investors withdrawing record amounts of cash, forcing the funds to sell off more investments and driving prices down further.
Over the past twelve months, emerging markets are down an average of 45% as compared with declines of 35% for the UK and a mere 20% for Japan.
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More bad news to come
Shell-shocked fund managers aren’t convinced the bloodbath is over.
They know that even though the banking systems in these countries are mostly sound, and that countries like China, India, Russia and others have vast foreign reserves to support their economies, the markets are now in the grip of a panic and there’s no knowing when it will end.
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Long-term growth ahead
That said, you can also be confident that these emerging economies will continue to grow much faster than the developed world - even next year, China and India will record 6-7% growth - and that just as giant steel, car and banking firms emerged from the growth of the US economy, over the next decade the emerging economies will create their own ‘blue chips’ like Sony, Toyota and Samsung.
So there is still a strong case for investing in emerging markets if your timescale is a decade or more.
I wouldn’t advocate making a lump sum investment at the moment. But I do believe that emerging market funds should be part of any long-term regular savings plan.
| Selected Emerging Market investment funds | Return* over 1 year | 3 years | 5 years |
| Aberdeen Emerging Markets | -30.5% | +10.5% | +97.6% |
| First State Global Emerging Markets | -28.4% | +11.9% | +73.5% |
| JPMorgan Emerging Markets | -39.4% | -0.2% | +95.8% |
| | | |
* Including reinvested net income. Data to 7/12/2008. Source: Financial Express
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With fund supermarkets, you can create a mini-portfolio with just a few hundred pounds per month.
If you hold capital you’re planning to invest at some point, use this type of plan to ‘drip-feed’ your cash into the market.
Over the next few years, you’re likely to buy a lot of cheap investments – and at some point, their prices will probably rise sharply, giving you a handsome profit.
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Has happened in the past
That’s what’s happened many times before, and it’s far more likely that this will happen again than that the financial world will disappear down a hole in the ground.
Here’s a mini-portfolio of investment funds designed for a 10-year-plus time span. It contains two ‘safer’ funds investing in large companies paying good dividends, and two riskier funds investing for growth in emerging markets and natural resources.
The idea is that the two safer ones chug along steadily, while at some point one or both of the racier ones have a massive boom enabling you to cash in at a big profit.
A £400 per month regular savings plan
| Type of fund | Name of fund | Amount per month |
| UK: aims for high and rising income from mainly large companies | Jupiter Income | £100 |
| Worldwide: aims for rising income from mainly large companies | JPMorgan Global Equity Income | £100 |
| Worldwide natural resources | JPMorgan Natural Resources | £100 |
| Global emerging markets | Aberdeen Emerging Markets | £100 |
| TOTAL | | £400 |
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment.
Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
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