Picking tomorrow’s winning markets

Ed Monk

Ed Monk - Fidelity Personal Investing

A common perception of emerging markets is that they are on a journey towards full maturity, and that a point will eventually come when they stand eye to eye with the world’s developed markets.

Picking tomorrow’s winning markets

Even the term ‘emerging’ suggests this process - sooner or later these markets will have, well, ‘emerged’.

The problem for investors is that, too often, they can stay emerging forever.

Consider the BRIC countries. The acronym stands for Brazil, Russia, India and China and was coined around 2001 by Goldman Sachs Asset Management chairman Jim O’Neill. Later on South Africa was added to complete the BRICS.

These countries were supposed to represent the leaders of the next economic century, and for almost a decade it looked like they would fulfil that role. According to data cited by CNBC recently, the BRIC economies accounted for just 20% of global GDP in 2003 but nearly 30% 10 years later.

The period since then, however, when the world has been dealing with the aftermath of the financial crisis, has seen a tremendous divergence in the performance of the BRIC member nations. While China and India have continued to grow strongly, commodity-dependent Russia and Brazil have struggled badly.

And even the continued progress of China and India may not have translated into bumper stock markets gains. In China, for example, while the long-term trend is undoubtedly upwards the period since the BRICs came into being has also seen periods of dramatic losses. The MSCI China Index remains lower today than its high prior to the financial crisis.

With the benefit of hindsight, some cynics argue that the BRICs were nothing more than a marketing tactic - a powerful story to encourage investment in markets that would otherwise been deemed too exotic.

That isn’t quite fair, in my opinion. Anyone asked to identify the next economic success stories at the time would have drawn up a similar list, and it will still be a while before we can say these countries won’t be among the long-term economic winners.

For investors, it would be a mistake to turn away from emerging markets. Indeed, there is plenty of evidence to suggest that the global economic hierarchy is changing, even if not as dramatically as the BRICs narrative suggested it would all those years ago. This week the International Monetary Fund (IMF) published its latest World Economic Outlook, predicting that it will be the emerging economies that provide growth in the years ahead, while the developed world slows.

Advanced economies, the IMF said, grew by 2.2% last year and will grow 1.8% this year and then 1.7% next year. That compares to 4.5%, 4.4% and then 4.8% for emerging markets and developing economies.

Investors can’t afford to ignore the high-growth areas of the world. The BRICs experience suggests that picking just one, or a small number, of emerging economies to be the next big winners is a fool’s errand. Some emerging markets will do just that, others won’t.

By investing via emerging markets funds you give yourself a chance to spread exposure across many markets, and a number of these funds feature on our Select 50 list.

Stewart Investors Asia Pacific Leaders Fund looks for companies with a sustainable future and a ‘social usefulness’ in the South East Asia and Australasia regions.

Fidelity Emerging Markets Fund, managed by Nick Price, invests globally, with large positions in Latin America, Africa and emerging Europe.

More on:
Stewart Investors Asia Pacific Leaders Fund
Fidelity Emerging Markets Fund
Select 50

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.