Understanding emerging markets
Emerging markets (EM) is a term used to describe the economies and stock markets of countries experiencing rapid growth and industrialisation; many people think of them as the countries moving from developing (or third world) status to becoming developed nations.
There are approximately 20 countries currently accepted as emerging markets, with Brazil, Russia, India and China (also known as the BRIC countries) being the fastest growing developing economies. (India and China accounting for 40% of these). First introduced as an investment focus in the 1980s, those countries initially made a lot of money available for businesses. However, during the mid to late 1990s, various emerging market stocks performed poorly and gave the perception of emerging markets as highly volatile and risky despite their long term results being positive.
Emerging markets are now managed differently for investment purposes and various factors are greatly reducing the fluctuations previously seen in this segment.
Emerging countries are expected to grow faster than developed nations like the US according to International Monetary Fund (IMF) estimates in the longer term. Our managers suggest that there are several exciting investment themes emerging in these markets, such as technology, domestic consumption, financial services upgrades and changing the energy mix, which is all driven by the growth of urbanisation, the increasing size of middle income groups in society and a boost in intra-emerging market trade.
There is still a real under appreciation of the quality of emerging markets companies. The asset class is extremely diverse and represents a huge opportunity set for investors.
What makes emerging markets different and attractive?
In contrast to other markets, emerging markets are usually:
- regional economic powerhouses with large populations, large resource bases and large markets
- transitional societies undertaking domestic economic and political reform
- amongst the world’s fastest growing economies, contributing to a large part of the world’s trade
- critical participants in the political, economic and social affairs of the world
- technological applications adaption.
One of the factors which has led to the emergence of emerging markets is the need for these countries to seek capital to finance their development. Many emerging markets use fiscal policy to help boost demand and longer run growth through tax reform and prioritised spending. Structural reforms are in progress to help raise productivity, removing bottlenecks to production, which is urgently needed in many economies.
The risks associated with emerging markets can be similar to the risks in established markets, with additional challenges because of the difficulty in assessing those risks. Specific risks include language and cultural barriers, differing business practices and requirements, variations in regulations and laws, and political environments.
As emerging markets tend to have a younger population base, higher population growth and rapidly increasing income levels compared to developed nations, they are forecast to have a higher potential of economic growth, especially with new technology, and the potential for good long term investment returns.
As a specialist asset class, there are a lot of specific investment and tax issues that need to be assessed so using an experienced asset manager may be a wise choice.
AvSuper’s emerging markets exposure
AvSuper’s profit-for-member approach means all investment decisions are made to benefit members over the long term and help you build your retirement savings in an effective and prudent manner. We use a range of investment managers to ensure members’ money is invested to meet specific objectives and strategies.
On average, AvSuper has an emerging markets exposure of about 12% of our total international equities portfolio, using fund managers with significant experience in researching emerging economies and with long term commitments to investing in these dynamic emerging markets.
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