So, the question for investors is how much of their assets should they allocate to emerging markets and in what way? Any diversified asset allocation strategy would suggest some exposure to emerging markets, but the case for increasing exposure has been strengthened by the subdued growth expected in the UK, US and Europe.
You don't have to go the whole hog but some seasoned investors such as Jim Rogers, the co-founder of the legendary Quantum Fund with George Soros, think the west's time is over and that you should allocate all your investment firepower to the emerging powers of Asia.
There are several ways of accessing the emerging markets story. You can entrust your cash to one of the plethora of investment funds covering the emerging markets sphere. This can be through a generalist fund or specialist fund covering the BRIC countries, regional funds or country-specific funds. The growing popularity of exchange-traded funds (ETFs) also means investors can play the emerging market story by buying a product that tracks the emerging markets indices or countries therein. Finally, you can buy directly into UK-listed companies operating primarily in the emerging markets.
Funds
The easiest way to gain general exposure to emerging markets is to allow someone better qualified to invest on your behalf. There are dozens of emerging markets investment funds, many of which boast fund managers who have been investing in emerging markets for many years. For example, Dr Mark Mobius recently celebrated 20 years at the helm of his Templeton investment trust and 40 years investing in emerging markets.
The benefits of taking a five-year view on investing in emerging markets is borne out by the performance of the top funds in the sector. Notable generalist emerging markets funds with strong multi-year track records include Aberdeen Emerging Markets, which has grown by 184 per cent over five years, Baillie Gifford Emerging Markets Growth, JPM Emerging Markets and First State Emerging Markets which have risen 174 per cent, 163 per cent and 161 per cent respectively over five years.
If you want exposure to one particular country or region there are also plenty of funds available. For China, the First State Greater China Growth and the Gartmore China Opportunities funds have risen by 167 per cent and 153 per cent respectively over the past five years. Funds are also available for India from Jupiter and Neptune among others and Neptune has a Russian fund, while Barings has a dedicated Korea fund.
For other regions there are dedicated Latin American funds with strong track records from Threadneedle, whose Latin American fund has grown 229 per cent over five years and Invesco Perpetual, up 216 per cent over five years. Investec and Fidelity have African and Middle Eastern funds and several fund management groups, including Invesco, Jupiter and JPMorgan have emerging Europe funds.
Investors who prefer using ETFs can access a wealth of different emerging markets products from generic index trackers, which follow the MSCI Emerging Markets index, to country trackers and hybrids such as 'Chindia' trackers and even products that track emerging markets infrastructure investment.
| Emerging markets ETFs from iShares |
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iShares Xinhua 25 iShares MSCI Brazil iShares MSCI Eastern Europe iShares MSCI Far East ex-Japan iShares MSCI Emerging Markets iShares MSCI Emerging Markets Small Cap iShares MSCI Korea iShares MSCI Latin America iShares MSCI Turkey iShares MSCI Emerging Markets Infrastructure |
STOCKS FOR ACTIVE INVESTORS
Investors can build their own portfolio of UK-listed companies with significant exposure to different emerging markets countries and industry sectors. In some cases the emerging market exposure may be watered down by more diversified revenue streams from the developed world.
Standard Chartered
The emerging markets bank is one of the most economically sensitive stocks an investor can buy when looking for emerging markets exposure. The bank took a hit when the global financial system went into toxic shock following the collapse of Lehman Brothers a year ago, but its lack of exposure to the sickly western economies meant its balance sheet was not quite as dramatically ravaged as many of its developed world peers.
As the economies of Asia return to health, this should feed through into Standard Chartered's performance. In its most recent results the bank showed double-digit profits growth, driven primarily by wholesale banking rather than its consumer division, where profits halved and bad debt provisions leapt. Even so, a fund-raising has shored up its balance sheet and the bank's retail deposits heavily outweigh its lending book, to the envy of many western rivals.
Standard Chartered
PZ Cussons
Consumer care goods maker PZ Cussons offers investors exposure to Africa and the Nigerian market in particular and also Asia. Profits in Africa grew by 18 per cent in its last financial year. The performance of the maker of Imperial Leather and Morning Fresh among other products has proved resilient due to its wide geographical spread with a strong presence in Indonesia, Thailand and the Middle East as well as West Africa and Europe.
PZ Cussons is investing heavily in its infrastructure, building new production facilities in Nigeria as well as in the UK. Despite such capital expenditure, the group has only small debts to contend with and its cash generation should see it move into a net cash position in the near future. With 65 per cent of its business in emerging markets, PZ Cussons offers the classic play of emerging markets growth backed up by a solid position in the developed world.
BAT/Imperial Tobacco
The cigarette makers rely pretty much exclusively on the emerging markets for their growth as the number of smokers in the developed world continues to decline. Because they deal in relatively price inelastic and addictive products, the cigarette makers also offer defensive growth in troubled markets. British American Tobacco (BAT) and Imperial are also regarded as safe dividend plays due to their highly cash-generative nature.
And with smoking rates still rising sharply in highly populous countries such as China, India and Indonesia, the tobacco giants are well-placed for balanced, defensive growth.
Unilever
The consumer goods maker is another company with a global spread of businesses, but around 50 per cent of its sales are now concentrated in the emerging markets.
In the short term, Unilever could continue to be held back by its exposure to the stagnant consumer economies of the developed world. But Asia, Africa and central and eastern Europe now make up Unilever's biggest markets. Half-year results showed the company had managed to drive positive overall volume growth, up by 2 per cent, when sales volumes in Europe fell by 1.9 per cent.
AIM OPPORTUNITIES
The internationalisation of the Alternative Investment Market (Aim) has brought the world to the UK investor's doorstep over recent years. Before the credit crunch kicked in, the opportunities were so diverse one could invest in Ukrainian dairy, Vietnamese property, Chinese telecoms hardware, Indian power, Tartarstani telecoms as well as natural resources companies located in almost every corner of the globe.
Admittedly, there have been several examples of poor corporate governance and investors have lost significant amounts in companies such as Canton Property, ZTC Telecoms and Jetion Holdings in recent months.
But a peek at the biggest companies resident on the junior market emphasises the role emerging markets companies still play. Aim’s biggest company is currently Centamin Egypt, a gold explorer that is about to move to the main list. Also in the top 20 Aim companies by market capitalisation are miners African Minerals, Kalahari Minerals, Coal of Africa, Indian power company KSK Power Ventur, Chinese coal-bed methane business Green Dragon Gas and Malaysian food additives business PureCircle.
Below we highlight a selection of the better prospects for UK investors considering direct investment into the emerging markets.
KSK Power Ventur
KSK is a growing Indian power generator. Feeding on the long-term demand caused by the structural deficit between supply and demand in the sub-continent, KSK has an ambitious pipeline of development over the next few years.
The company currently has just 144 megawatts (MW) of power production under operation but, in the short term, 718MW will be commissioned over the next three quarterly periods and the hefty 3,600MW Wardha power project at Chhattisgarh will see work commence on site this year. Beyond that a further 6,400MW of projects are under consideration. The structural deficit in India's power generation is likely to persist for several years as the economy continues to grow and outstrip the additional capacity.
KSK Power Venture
China Shoto
Investors in China Shoto get direct exposure to the huge growth of Chinese telecommunications. The company' provides high-performance batteries and back-up power systems to telecoms giants such as China Mobile. The huge surge in telecommunications in China has played right into Shoto's hands. With the roll out of third-generation (3G) networks expected to ramp up in the coming years, sales within China remain on an upward trajectory and the company is also developing its export business.
PureCircle
Malaysian food additives maker PureCircle is a play on the world's search for a natural low-calorie replacement for sugar. It specialises in 'Reb A', a naturally occurring high-intensity sweetener extracted from the stevia plant. Traditionally a plant of South America, PureCircle now sources much of its raw material from Chinese plantations but also has plans for plantations in Kenya and Paraguay.
The plant extract is extracted in China and refined in Malaysia, where production facilities have been ramped up significantly since the company floated on Aim. Crucially, Reb A has been approved in markets such as Australia, New Zealand, Switzerland, France and the US for use as a food additive, and is already being used by PepsiCo and Coca-Cola. The food and beverage companies are desperate for a viable and natural sugar replacement to offer to increasingly health-conscious consumers.
New Britain Palm Oil
Palm oil producer New Britain, which has plantations in both Papua New Guinea and the Solomon Islands, is a play on both cheap emerging markets production costs and also the growth in demand from emerging market consumers for its products. Palm oil is used in the production of food and cosmetics, and demand has risen sharply in recent years as, firstly, western consumers demand more natural oils are used in their foods, and, secondly, emerging markets consumer demand grows rapidly.
New Britain came to the Aim market with established production already in place in Papua New Guinea. In future years it will direct much of its production through a refinery which is being built in Liverpool, and this will allow the company to sell fully accredited sustainable palm oil into the European market.
New Britain Palm Oil
Rurelec
Rurelec has a growing portfolio of power generation assets in Bolivia and Argentina. In Bolivia, its Guaracachi joint venture will provide almost half of the country's power once its current expansion project is complete, and in Argentina a further expansion project means Rurelec will have a 50 per share of 128MW of power production. Rurelec's share price has been hit by funding concerns as the credit crunch restricted the availability of expansion funds; however, a refinancing of the Argentinian business is expected shortly which should dispel any concerns. The Bolivian business has already been refinanced.
