Five Biggest Myths of Investing in Emerging Markets
November 21, 2011
"Emerging markets are just a niche asset class" persistently remains as one of the five biggest myths about investing in emerging markets, said John Flint, chief executive officer of HSBC Global Asset Management.
Flint was addressing Fund Forum USA's Global Fund Distribution Summit in Boston earlier this month.
"Many people continue to think of emerging markets as a chronology of crises, including the 1998 Russian default, the 1997-98 Asian financial crisis and the 2009 Dubai debt crisis, but the fact of the matter is, the GDP and trading volumes of developed and developing nations began converging in 2010," said Flint, adding that one-third of HSBC's assets are in emerging markets.
"Year-over-year 2010 export growth in China was 24.5%, and in India, 81.8%, compared to 14.7% in the United States of America," Flint said. "Emerging markets are now anchoring global growth."
In 1990, world concentration of GDP was 78% in developed nations and 22% in emerging markets. In 2010, developed nations' share of world GDP had slipped to 62%, while emerging markets' share had risen to 38%.
By 2030, the 2010 figures are projected to flip-with the world concentration of GDP in emerging markets expected to reach 61%, and in developed nations 39%, Flint noted.
"This shift is happening in the underlying economies of the emerging and frontier markets, and our industry needs to respond to that," Flint said.
5 Biggest Myths:
1. Emerging markets are just a niche asset class.
Fact: Emerging markets comprise 33% of the global equity market and 13% of the global bond market.
2. Investing in emerging markets is only possible in the equities markets.
Fact: Emerging market debt has significantly outperformed traditional equities and fixed income over the long term.
3. Emerging markets are just a BRIC-Brazil, Russia, India and China-story.
Fact: Frontier markets and CIVITS-China, India, Vietnam, Indonesia, Turkey and South Africa-are the new buzzwords. Over the past five years through Sept. 30, 2011, the CIVITS index has risen 79.4%, and the BRIC index, 12.2%.
4. Emerging markets are just too risky.
Fact: China is now rated AA-, up from BBB in 1995. Chile is now A+, up from BBB. By comparison, Japan is now rated AA-, down from AAA, and the United States, of course, has been unceremoniously downgraded to AA+ from AAA.
Further, the JPMorgan EMBI Global Index now consists of 57% investment-grade securities. On top of this, developed nations' government debt as a percentage of GDP ranges from 66% to 200%, whereas among emerging market nations, those figures range from 11% to 76%. The same is true of household debt: GDP ratios which range from 62% to 114% in developed nations and only 7% to 48% in developing nations.
5. Emerging markets are decoupled from developed markets.
Fact: If the developed nations fall into a double-dip recession, it will impact emerging markets.
This is not to say that there are not risks in emerging markets, Flint said. These include a lack of capacity to absorb hot money flowing in from the West, illiquidity, overexpansion of credit on their bank balance sheets, fast-changing tax laws and regulations, lower corporate governance standards and transparency, and inflationary pressures.
"You have to go there, be there and understand what you are investing in," Flint said. But know this: "A significant shift in the world is underway."
In related news, Fidelity Investments has just launched two broad-based emerging markets funds, the Fidelity Total Emerging Markets Fund and the Fidelity Emerging Markets Discovery Fund.
Fidelity noted that the objective of the Total Emerging Markets Fund is to invest in both debt and equity securities, which can be opportune, as much of the economic activity in emerging nations is not yet in formal industries or produced by public companies. In addition, while equities in emerging markets can be volatile, exposure to debt can offer relative stability, said John H. Carlson, portfolio manager of the fund.
The Emerging Markets Discovery Fund will invest in small- and mid-cap stocks, concentrating heavily on consumer sectors. Fidelity believes investing in these companies at an early stage of growth for the emerging markets can offer "a compelling growth opportunity," said the manager of this fund, Ashish Swarup.
Accompanying the launch of these two funds, Fidelity issued two white papers making the case for investing in emerging markets. The fund giant notes that there are three billion people, or 43% of the world's population, living in China, India, Brazil and Indonesia.
"The world has witnessed significant economic growth and wealth creation in countries across the globe during the past 50 years," Fidelity noted.
"During the last 20 years, more than one billion people have risen out of poverty in developing countries. But what is unique so far in the 21st century is the large size of some of the [emerging markets] populations that are moving through the rapid economic development phase,'' the fund firm said. "Rapid economic development in such large populations presents challenges as well as tremendous opportunities-both for residents of these countries and for investors in emerging markets."