As investor risk aversion faded over the summer months, emerging markets indices kicked on with a vengeance, even outperforming the recovering stock markets of the developed world. Is this indicative of a longer-term structural change in investor attitudes that suggests the emerging market economies could actually be the drivers of global economic recovery, rather than the traditional engines of credit-driven demand of Europe and the US?
Investing in emerging markets has been notoriously risky but investors in UK-listed banks have seen their investment portfolios trashed in recent years, so the argument that you could lose your shirt in emerging markets investment begins to carry less weight. And with countries such as the UK and US heading for a period of extreme indebtedness, this could act as a brake on significant growth in the coming years. Increasing your exposure to emerging markets where governments, businesses and consumers are less heavily leveraged and growth prospects look much more promising appears sensible.
Even though emerging markets indices bore the brunt of the flight from 'risky' investments by investors in late 2008 and early 2009, their recovery has been swift and dramatic with the MSCI Emerging Markets index up 63 per cent so far this year and the MSCI BRIC index up by 75 per cent.
As renowned emerging markets investor Dr Mark Mobius, manager of the Templeton Emerging Markets Investment Trust, puts it: "The key is growth. Growth is higher [in emerging markets]. The most populated countries in the world are also the fastest growing."
Indeed growth rates in China, India and Brazil continue to outstrip the western world. China's gross domestic product (GDP) is forecast to grow at 8 per cent both this year and next despite the poor outlook for exports to the west. India is expected to grow by between 5 and 8 per cent this year and Brazil could grow by 4.5 per cent. China in particular has engaged its command economy in a huge multi-billion dollar infrastructure spending splurge to prop up its growth rate and compensate for the reduced demand from its own consumers and from export markets.
China, and the health of its economy, remain key to the prospects of the wider emerging markets economies. Two other members of the 'BRIC' club, Brazil and Russia, are major trading partners with China, whose voracious appetite for natural resources is partially sated by its resource-rich peers. China is also a major player in trade with other resource-laden emerging markets, such as the new frontier of Africa.
There is a growing consensus that the emerging markets will be the main growth drivers of the world over the coming years as the developed world economies are stymied by their obligations to pay off the excesses of the pre-credit crunch boom. The health of the main consumer economies of the west remains important to the emerging economies, but less so as their own consumer classes continue to grow rapidly and the trade between emerging economies themselves also grows apace.
