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A more adventurous approach...

by
01 December 2010, at 12:00am

DYLAN JENKINS suggests a change of tack with investments to help ensure your objectives remain on track

WITH the recession still far from being over, many of us are still feeling the pinch on our finances. Combine this with the imminent arrival of Christmas and I am sure that the last thing on anyone’s mind is to look at increasing contributions into their pensions and investments.

Indeed, many people may have stopped paying into their schemes due to a lack of surplus income and will defer the recommencement of premiums until we enter a more stable economic climate. 

However, even if you have stopped paying premiums, there is still plenty that can be done to ensure your money is made to work as hard as possible. In this article I will look at the possibility of taking a more adventurous investment approach with your funds in order to make up for the lack of regular contributions and ensure your retirement and investment planning objectives stay firmly on track.

In particular I will be focusing on the possibility for investment in the emerging markets equities sector. This is tipped by many analysts to be one of the key areas for investment growth over the medium to long term.

Emerging markets are considered to be nations with social or business activity in the process of rapid growth and industrialisation. Currently, there are 28 emerging markets in the world, with the colossus economies of China and India considered as being by far the largest.

Outlined below are eight reasons why I believe it is more important than ever for investors to have sufficient exposure to emerging market growth within their pensions and investments.

1. Drivers of global growth

When combined, the emerging markets, including the Middle East, comprise the largest economic sector, accounting for around 36% of the global economy in terms of gross domestic product (GDP).

According to the International Monetary Fund’s latest estimates, China is the single country that contributes the most to global economic growth, with Russia, Brazil and India also among the top eight contributors. Higher economic growth tends to lead to higher equity market returns.

2. Favourable demographics

Emerging markets represent approximately 75% of the world’s land mass and house more than 80% of the global population. Most of the future population growth is expected to be in emerging markets, where the population is expected to grow five times as fast as in developed countries. 

This means emerging markets tend tohaveahigh–and growing – proportion of young, skilled people.

3. A high and growing number of consumers

By 2030, more than one billion people in emerging markets are forecast to join the ever-increasing consumer middle class. Currently, personal consumption in China accounts for only 37% of GDP, compared with more than 60% and 70% in Europe and the US respectively. There is, therefore, scope for significant further spending.

4. Increased consumer spending power

The world’s savings are concentrated in emerging markets, which hold 75% of the world’s total foreign exchange reserves. Emerging economies are also far less indebted than their developed peers.

Importantly, banks in emerging market countries have emerged from the recent credit crisis relatively unscathed as they generally had little or no exposure to the “toxic assets” associated with the sub-prime mortgage fallout in the US. This provides strong foundations on which to build future growth.

5. Reduced dependence on developed economies

Emerging markets have a wealth of natural resources, including more than 90% of oil and gas reserves, 70% of coal reserves and 60% of copper, nickel, iron ore and bauxite reserves.

“South-south trade” (not involving developed economies) has proved resilient, and emerging markets are fast becoming the largest commodity consumers as the urbanisation process (linking urban and rural populations) continues apace. 

6. Superior profitability

High GDP growth typically translates into higher return on equities held within that nation. Statistically, the profitability of emerging markets’ companies is superior to that of companies in developed markets.

7. Similar volatility; higher returns

It is perhaps a common misconception that investment in emerging markets is thought of as being very volatile and certainly as being more risky than investment in developed markets. However, over the past 10 years, a blended portfolio of emerging markets and developed markets exposure would have demonstrated a similar level of volatility (i.e. fluctuations in value) but provided far superior returns.

8. Market capitalisation

Despite their dominance in terms of world population, land mass, foreign exchange reserves and GDP growth, emerging markets have just 10% of world equity market capitalisation. This has been growing over the past decade, and with it equity market returns have risen.

This trend is likely to gather pace over the coming years leading to massive growth potential for investors willing to expose themselves to this investment market. 

Conclusion

It is clearly evident from the eight points listed above that there is significant potential for investment growth via exposure to the emerging markets. But in order to provide a balanced view- point, it is also worth noting that these markets are deemed by many investment advisers to be far more volatile and illiquid than more mature markets and therefore your investment will be at greater risk.

In addition, political risks and adverse economic circumstances are more likely to arise, putting the value of your investment at risk and the market value of investments and the income from them can go down as well as up. Shares may be subject to sudden and large falls in value and you may get back less than the amount invested.

It is therefore imperative that you consult the services of a professional investment manager before making any investment switches and that your portfolio is structured to meet both your attitude to investment risk and overall financial objectives.