UBS. “In fact, they are trading at 10% above
what we would consider to be crisis levels.”
The forward price-earnings valuation for
the MSCI Emerging Markets Index is 11.8.
This compares with 15.3 for the MSCI World
Index and 16.8 for the US. Emerging markets
are usually cheaper, so a valuation discount
is not unusual.
But before you dive in, there is a lot to weigh.
“Emerging markets are for investors looking
for higher rewards but also higher risks,” says
Sarah Shaw, a global investment manager and
chief investment officer at 4D Infrastructure.
The politics of emerging countries are
often more unstable, with higher levels of
corruption than in developed countries.
Many emerging markets are dominated by
commodity-producing companies, which tend
to go through long highs and lows.
“Certainly in the short run there are plenty
of event risks such as the trade war [between
US and China] and a number of elections, and
further afield we have Brexit happening,”
says Wong. “But if you look beyond that at
the long-term growth in the world in the
next five years, two-thirds of the growth
is coming from emerging markets, with half
of that coming from China and half from the
rest of emerging markets.”
Why is growth so strong in emerging
countries?
“Given the potential size of the middle class
in emerging markets, with China, India and
Indonesia alone accounting for 40% of the
global population, changes in spending and
consumption patterns will have significant
implications for global business opportuni-
ties and investment for decades to come,”
says Shaw.
The 24 countries that make up the Morgan
Stanley Capital International Emerging Mar-
kets Index (MSCI EMI) include Brazil, Chile,
China, Colombia, Czech Republic, Egypt,
Greece, India, Indonesia, Korea, Malaysia,
Mexico, Morocco, Qatar, Peru, Philippines,
Poland, Russia, South Africa, South Korea,
Thailand, Turkey and United Arab Emirates.
This index tracks the market capitalisation
of every company listed on the countries’
stockmarkets. There are also eight countries,
such as Argentina, Hong Kong, Jordan, Kuwait,
Saudi Arabia, Singapore and Vietnam, that
are tracked by other indices.
While there are troubles in some emerging
markets, there is a range of robust countries
that are performing well. On the whole, the
International Monetary Fund estimates that
the economies of emerging markets will grow
4.5% in 2019 and improve to 4.9% in 2020.
Asia is a standout, says the IMF, with esti-
mated growth of 6.3% in 2019 and 6.4% in 2020.
“We are very bullish on the long-term outlook
for China and the opportunities in China’s
economy,” says Hamish Douglass, chairman
and lead portfolio manager at Magellan. “It’s
a massive economy with a massive educated
population, with probably what will be the
world’s largest domestic market.”
India’s economy will pick up in 2019, says the
IMF, boosted by lower oil prices and a slower
pace of monetary tightening than previously
expected, as inflation pressures ease.Economic growth forecasts
One of the weakest emerging markets will
be emerging and developing Europe in 2019,
with a meagre forecast economic growth
of 0.7%. This is down from 3.8% in 2018,
pulled back by the Turkish economy despite
generally buoyant growth in Central and
Eastern Europe. It is forecast to recover to
2.4% in 2020.
Latin American growth is forecast to recover
over the next two years to 2% in 2019 and
2.5% in 2020 but is being dragged down by
Mexico, Argentina and Venezuela.
Growth in the Middle East, North Africa,
Afghanistan and Pakistan is expected to remain
subdued at 2.4% in 2019 before recovering to
about 3% in 2020.
Economic growth forecasts for emerging
markets are typically well ahead of those for
developed markets. A 2012 report by MSCI
points out that there is no significant relation-
ship between economic growth and investment
returns in emerging markets. This is for several
reasons. One is that sharemarket prices already
have the growth expectations embedded in
them, so investors need to be careful about
being guided by growth information.
So what is the best way to invest in emerg-
ingmarkets?You probably have a stake in emerging
markets through your superannuation fund’s
global investments. For example, the MSCI All
Countries World Index has 12% in emerging
markets, so if your diversified investment
portfolio included 25% in global equities then
you would hold around 3% of your overall
portfolio in emerging markets.
But take a look at the benchmark for your
global investments. If the index is the MSCI
World, for example, then emerging markets
are not included. If it is the MSCI All Countries
index, then they are included. If you want
to hold more in emerging markets, you can
consider a dedicated emerging markets ETF
or managed fund.
There are active investment managers who
can take advantage of a number of market
inefficiencies such as sectors, countries, stocks
and currencies and consistently outperform
the index. But if you prefer a passive approach,
there are diversified, low-cost exchange
traded funds (ETFs).
Three broad index funds are Vanguard
FTSE Emerging Markets Shares (ASX: VGE),
which charges 0.48%pa in total fees; SPDR
S&P Emerging Markets (WEMG), which
charges 0.65%pa; and iShares MSCI Emerging
Markets Index (IEM), which charges 0.69%pa.
Vanguard’s ETF holds more than 4000
stocks with 36% of the fund invested in Chi-
nese shares, 14% in Taiwan, 11% in India and
8.6% in Brazil. iShares holds 800 companies
covering China (33%), South Korea (13%),
Taiwan (11%), Brazil (7%), South Africa (6%)
a nd Russia (4%).
Russell Investments’ Emerging Markets
Class A is a fund of funds, which picks and
mixes different specialist investment managers.
One of the advantages of the fund is that it
also invests in countries that are considered
to be “frontier” or “pre-emerging”, as well as
shares listed on developed markets’ stock
exchanges where the company receives much
of its revenue from emerging markets.
The lines between emerging market and
developed market companies are blurring.
When it comes to big multinational compa-
nies, it doesn’t matter so much where they
are listed but where they derive their income.
They could be listed in Australia but have
a large chunk of their sales to China.
You will also have indirect exposure through
Australian companies such as BHP Billiton
and Rio Tinto, which depend on demand in
emerging markets such as China. MEmerging market ETFs
iShares Asia 50 (AU) IAA
iShares FTSE China Large-Cap (AU) IZZ
iShares MSCI BRIC (AU) IBK
iShares MSCI Emerging Markets Index (AU) IEM
SPDR S&P Emerging Markets WEMG
Vanguard FTSE Emerging Markets VGE