HOW TIMES HAVE CHANGED

During the "credit crisis" of the second half of 2007, the emerging markets achieved a safe haven status, while Western markets were in turmoil. This is a remarkable turn of events.

In the 18th century China was the world’s biggest economy, seven times larger than Britain’s. But China chose isolation rather than participation in the industrial revolution, and the fortunes of Britain soared while those of China sank.

Europe has been on a 500 year journey to global preeminence, ably assisted by its most successful colonial offshoot, the US. Now emerging markets, particularly in Asia, are returning to centre stage, and it should be a long profitable journey for investors, and seldom dull.

The history of emerging markets is littered with problems. There were the US debt defaults in the 19th century, the Russian and Chinese revolutions of 1917 and 1949, Latin American debt crises of the 1890’s, 1930’s, and 1980’s, right through to the turbulence of the 1990’s, particularly the Asian crises of 1997-8.

Now vital for global growth

The role of emerging markets is now much more important in a global context. Although emerging Stock Markets account for only 10-15% of world Stock Markets, they now account for 50% of the global economy (GDP), and this share is set to increase. By 2040 China will be the world’s biggest economy, according to Goldman Sachs.

When the first emerging market fund was founded by Dr Mark Mobius in 1989, there were only 6 emerging Stock Markets (Mexico plus five in Asia) and he had $100m to invest. Now he is able to invest in 40 markets, and he has $30bn to invest. This dramatic change is because emerging countries have increasingly opted for market economies, with Thatcher-style privatisations in the vanguard.

Not the end of their renaissance

The most positive changes have been very recent. Much of the 1990’s were a poor period for investing in emerging markets, with a series of crises. The net result was that by 2002 an emerging market investment had lost about 60% since the peak in 1994. Many pessimists believe that emerging Stock Markets are now running out of steam, having gained 300% since March 2003 compared to global Stock Markets which are up only 116%. Yet the emerging Stock Markets only in 2006 rose above the sideways trend that contained trading through most of 1990’s.

Always short term risks

To a large extent it is pointless trying to guess (and it will be a guess) short term moves in emerging markets, though there are very clear risks (US recession?) and reasons to be cautious (four years of dramatic rises just behind us). Yet there are very strong trends, long term trends, that highlight the huge potential, and it is also clear over the last couple of years that any marked weakness is met by persistent buying.

For each investor the key is that you are comfortable with the high risks over shorter periods (a continuing potential for 50% falls), that you are taking an appropriately long view, and that you hold these investments within a rational and diversified portfolio.

Where next?

If you already have a good sense of the degree of risk with which you are comfortable, and how emerging markets might fit in to your portfolio, you can now explore the range of our highlighted funds.

If you still aren't sure what to do, you might first like a check-up on your existing funds . Alternatively if you have a more specific query, get in touch (contact us) and we will try and help.

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