Investors exercised caution over emerging markets this year as fears that the glory days may be over took hold. But could short-term woes be clouding their judgement? A look at the bigger picture shows the trend is still towards impressive growth.
Emerging markets will contribute to almost three-quarters of global growth in 2013. And the IMF's World Economic Outlook forecasts emerging markets growth of 5.6 per cent in 2013. While this is down from 2011, it looks like a party next to the depressing 1.5 per cent growth the 'advanced' economies can hope for.
Possibly as a result, Global Emerging Markets was the best-selling Investment Management Association (IMA) fund sector for the first time ever in October 2012, with net retail sales of £228m.
Window of opportunity
There is clearly an abundance of opportunities still up for grabs, but while some developing markets have thrived, other former performers have been left behind. In 2011 and 2012, emerging markets underperformed developed markets - but that also means their valuations have fallen to more appealing levels against developed markets. Analysts say now is a good window of opportunity to buy cheap stocks.
A growing number of emerging markets fund managers are now underweight in Latin America. Defenceless to the knock-on effects of the euro crisis and the US’s so-called 'fiscal cliff', and with Brazil's disappointing growth story, investors have been put off the region as a whole.
And China has had a tough year stuffed with growth woes - which have appeared even more challenging against the shaky backdrop of leadership changes. But optimists say next year the country is expected to stabilise and pick up. There will be more fiscal spending as infrastructure and retail sales are set to climb, while growth predictions of 8 per cent for 2013 also look promising.
From Russia with income
According to Steven Burrows, fund manager at Pictet, Russia stands out from the other Bric nations as an exciting investment opportunity for the coming year. It is heavily associated with oil prices, but the real catalyst next year will be increasing dividend payments – making it a good bet for income seekers. More Russian companies than ever before have strong balance sheets and strong earnings which continue to improve - a sign of strengthening corporate governance and a reason to feel more confident. The rising number of income seekers will be pleased to see the dividend-to-earnings ratio has risen by 25 per cent this year alone.
But opportunities in developing economies are often riddled with risk and this one is no exception. Russian households have racked up unprecedented and unsustainable levels of debt - with a record number of households taking out loans to pay off interest on old loans. This has sparked fears that Russia's consumer spending could soon dry up - in turn threatening the balance sheets of businesses. However, growing dividend yields are a trend not just confined to Russia. Fifteen years ago, less than 40 per cent of emerging markets companies paid dividends, whereas this year around 88 per cent are paying a dividend.
In even riskier frontier markets, meanwhile, the financial sector is booming. Locally grown cheap banks provide good access to rising penetration of credit - including mortgages, loans and insurance.
