Big stories and grand narratives help anchor our views of a constantly changing world as well as give shape to a portfolio through constant tweaks in the mix of different assets. The big narrative that's been exciting investors for some time is the case for emerging markets – and how they will be the home of future economic growth.
This optimistic interpretation of profound structural changes wrought by globalisation usually includes a roll-call of economic achievements, chief among them the observation that the emerging markets (EM) economies have nearly doubled relative to the developed world, increasing from 18 per cent of the world's GDP in 1994 to 31 per cent by 2009 (based on IMF data) while developed world economies have stalled, with their contribution falling from 82 per cent to 69 per cent of world GDP.
But a growing number of investment analysts and fund managers are starting to openly challenge this narrative. These sceptics don't necessarily dispute the extraordinary growth of these local economies – their case against EM as an investment idea is that top line economic growth tells us very little about prospects for future stock market gains. Their attack on emerging markets as a sensible choice for private investors ranges from a comprehensive analysis of long-term historical stock market data through to a notably more pessimistic view of future prospects. As investors, it pays to watch for these cracks and to choose our investment strategy carefully.
