From China to Brazil and a few places in between, investment in emerging markets has seemed a grim endeavour lately. But the outlook for some countries looks good, and for patient investors the rewards could be great.
Read on for the two main reasons for investing in emerging markets right now, and the best countries to invest in.
#1: WAIT FOR THE UPSWING
Unlike stock markets in the UK or US, which tend to move in a general upwards direction over time, stock markets in developing countries can have long periods when they do exceptionally well, and then long periods when they are just universally shunned.
That’s the case at the moment, as the chips are down for many developing countries. Brazil and Russia are in recession, while China’s stock market has been tumbling and the authorities have struggled to contain it.
Because investment in emerging nations can be quite risky, the whole batch tend to be either in or out of favour. This kind of binary perspective doesn’t fairly represent the real risks of all emerging markets. Not every one of the 23 countries considered emerging will be terribly risky over the next few years. In reality, there will be pluses and minuses for each country at any given time.
In the last five years, the MSCI Emerging Markets index has lost investors 5 per cent, but there will be an upswing at some point.
“Investors need not worry about the next five years, but instead consider topping up investments for when their prospects turn around. You get these cycles when they stay out of favour for five or 10 years and when they come back they do very, very well,” says Adrian Lowcock of Axa Wealth.
#2 SHARES ARE CHEAP
When looking at shares, one of the most important things to consider is the actual price of the shares in relation to how much potential they have to rise. Professional investors have lots of ways of measuring this, such as price-to-earnings ratios or price-to-book measurements. But put simply, there is no point buying shares in a company which cost £50 each, say in the UK, if many experts are saying UK stocks on the whole are very expensive and not likely to go up much more.
The key thing is, if you look at the price of shares in emerging markets before the recent carnage, they were already cheap, says Lowcock. Now, following the sharp falls in stock markets, shares in Asia and Latin America are even lower and even cheaper.
In contrast, investors had been pouring money into the US, sending the S&P 500 to record highs, and other areas such as Japan and Europe have been very popular too. These markets have already risen strongly over the last several years, and investors putting money into those markets will logically have less upside now than if they had bought shares when the prices were cheaper.
With emerging market equities generally cheap right now, there is more potential for them to rise. Lowcock says that “they were one of the few areas in the world where the shares had absolute valuations that were quite cheap. Everywhere else was looking a bit expensive.”
WHERE TO INVEST: INDIA
Lowcock says the emerging markets sector will still be under pressure, but there are bright spots that can do well. One of these is India.
Since the landmark election of Prime Minister Narendra Modi back in 2013, its stock markets have been doing well. Modi was elected on a reform platform and has set about doing just that. “The environment for emerging markets is tough. But places such as India are benefitting from lower commodity prices... and reform when it does come will be a benefit,” says Will Ballard of Aviva Investors.
India is the best emerging market at the moment, according to Juliet Schooling-Latter of FundCalibre. Two top funds dedicated to investment in the country are the Jupiter India and Goldman Sachs India Equity Portfolio funds. “They are both good Indian equity funds which have consistently delivered returns for investors,” she says.
WHERE TO INVEST: TURKEY
Its location on the cusp of Europe and the Middle East gives Turkey a great location from which to trade. It has a giant population of 74m, much of which aspires to become wealthy consumers, alongside old and established businesses. This country is a favourite with Aviva’s Ballard. “I am cognisant of the political situation and close proximity to Syria,” he says. “But it is a country that has well-run companies and will benefit from lower commodity prices too.”
A good choice for investment in Turkey is the JPM New Europe fund. It invests across the more recent ascendants to the European Union and across to central Asia, including Poland, Czech Republic and resource-rich Kazakhstan. Turkey is a top investment for the fund, with 18 per cent of its assets.
“One word of warning, though. It has a big weighting in Russia (over 50 per cent) due to the nature of the fund, so investors need to be comfortable with that too,” says Schooling-Latter.
WHERE TO INVEST: GENERAL FUNDS
Investors may be tempted to buy an emerging markets tracker fund, investing across all 23 markets. But Lowcock emphasises that this means having cash invested in weak companies as well as the stronger ones. “They are called emerging markets for a reason. Active managers give you a better opportunity to avoid those high risk areas,” he says.
A more general active fund which aims to select companies with a good corporate governance is the JPM Emerging Markets Income fund. It invests in companies which pay dividends – an indication they are well-established firms committed to shareholders.