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.
