But you also have to pick your fund or funds fairly carefully. What you want are volatile funds to maximise the benefits of pound cost averaging. I am a keen advocate of emerging market funds largely because their economics are so much better than those in the developed world. For starters:-
- They don’t seem to have become embroiled in the sub-prime credit crisis which has spread from the US to the UK and, most recently, to Germany;
- If you look at the back page of the Economist magazine, you will notice that many emerging markets have balance of payments surpluses, net cash reserves and achieve continuing above average levels of economic growth. Contrast that to the developed world, which often has large balance of payments deficits, runs large Government deficits (after all bailing out banks in the US, UK and Germany simply means printing more money) and probably negative economic growth for the next two years.
I note from a recent Fidelity statement that emerging markets now account for more than 50% of global economic growth – and I suspect that figure is gong to go up a lot more in the next two years.
But such strong economics does not mean that emerging stockmarkets have decoupled from developed country stockmarkets although there are a number of commentators who think they will or will do so soon. The big argument is that fast economic growth means a rising Middle Class which in turn wants consumer goods which these countries produce but at the moment mainly export to western economies. So as western demand falls, local demand will increase. Possibly, but as we have seen in recent months, emerging markets have Achilles heels in dealing with food price inflation. Clearly the rising cost of food (particularly rice) takes much more of the budget of the average emerging market inhabitant than you or I in the west. The way that emerging markets have countered this and other economic problems have been quite different than in the west, for example:-
- While western economies note the effect of inflation, they have been more worried about recession and so have not pushed up interest rates to combat recession. Not so India which has rapidly shoved up interest rates to combat inflation that was getting near to10% and with the not surprising result that the Indian stockmarket has fallen sharply this calendar year.
- Then there is Russia who (not surprisingly) invaded Georgia this summer when Georgia provoked them with an attack on South Ossetia. This (I believe) is a fairly measured response which spooked foreign investors who withdraw large sums of money. Investing in Russia is not the easiest of operations particularly following the introduction of a new Federal law on Foreign Investments in Companies Having Strategic Importance For State Security and Defence number 57 effective from 7 May 2008 – one of the last edicts signed by President Putin before he stepped down to the position of Prime Minister;
- China’s stockmarket has been probably the worst performer this calendar year of all emerging markets and that result has been due in part to the fact that the price of “A” shares that can be bought in China shot up to unsustainable heights and in some cases were 80% more than the “H” shares that foreigners can purchase via Hong Kong and in the same companies. It’s also partly due to the Government putting a sudden stop to property development – after all they still control Chinese banks and partly Government meddling in stockmarkets by raising and lowering Stamp Duty.
Indeed the only major emerging market, Brazil (one of the big four called BRIC Brazil, Russia, India and China) has largely avoided major problems this year although it has plenty of political problems on the horizon.
Investors also have to remember that unless the unit they invest in has special European approval (called UCITS 3), those funds have to be invested 95% or so in shares no matter what is happening in stockmarkets. So if a particular stockmarket falls and that is the only stockmarket the fund invests in, there is not a lot that the fund manager can do to avoid losses. For this reason I recommend that investors invest in emerging markets which permit the manager some leeway to spread the money about – then he or she can, hopefully, avoid the worst of falling share prices in one stockmarket by moving to another one. There is not a lot of leeway to do this but I think it is better than investing solely in one country.
If you would like to have details of a specimen emerging markets unit trust portfolio, please contact me.
Finally, a word of encouragement! In calendar 2007, Venezuela was the worst performing stockmarket along with Eire. In 2008 it’s currently the best performing emerging market stockmarket albeit in local currency terms. So not everything stays down forever.
