If the developed economies are in such a mess, what about emerging market investments?
Growth in the UK has virtually ground to a halt. It’s so weak that the Bank of England has just started buying £75 billion worth of gilts. In the rest of Europe, meanwhile, peripheral economies are in such a state that there are real fears some may go bankrupt. So if the core developed nations don’t present vibrant investment opportunities, what about the emerging markets?
Growth differential
Certainly, if you are looking to put money into younger economies with better growth profiles, you can find emerging markets that are likely to fit the bill. For example, China’s growth hasn’t dipped below an impressive annual 9% since 2001, although it is forecast to drop below 9% in 2012, while Brazil’s economy, bolstered by demand for its natural resources, surged 7.5% last year to become the world’s No. 7. Don’t forget, this is the country selected to host the FIFA world cup in 2014 and the Olympics two years later.
Debunking the ‘no dividend’ myth
One common misconception is that emerging market stocks don’t pay dividends, making them a longer term growth play rather than income generators. It is true that some merely pay lip service to returning shareholder value – in the last week of October, India’s benchmark index, the Sensex, yielded just 1.3%, while South Korea’s Kospi yielded only 1.4%. But better returns are available – 3.3% from Thailand, and – no surprises – an alluring 4.2% from Brazil. Those returns compare favourably with 3.5% on the FTSE All-Share, and dwarf the S&P500’s measly year-to-date return of 1.3%.
Beware of ‘crowded exits’ and political exposure
It’s not all plain sailing. You should be aware that your fellow investors have a tendency to withdraw their money from emerging markets in concert – as was seen when the 2008 financial crisis struck – which can mean big losses. And you can easily end up with political risk in your portfolio – many flagship emerging market companies are majority-owned by their governments, leaving stockholders vulnerable to the whims of politicians in need of re-election as well as the vagaries of the global economy. There’s also foreign exchange risk to consider, because emerging currencies are notoriously volatile in tough times.
With core developed economies in dire straits, emerging market stocks look an attractive option. But they bring their own risks, and should the global economy worsen they won’t be immune from the consequences. Emerging market investments are high-risk and therefore not suitable for everyone.
The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.