Emerging markets have over 90 per cent of the world’s oil and gas reserves, 70 per cent of coal and over 60 per cent of copper, nickel and iron ore. The combined imports to Brazil, Russia, India and China during 2009 are estimated to surpass the US for the first time, signalling a trend as the global economy’s dependence on the US consumer weakens. The combined investment potential of the sector is immense.
As you can probably tell, emerging markets has been a favourite area of mine for a long time. In fact, when my son was born in 1990, I started a monthly savings plan in a leading emerging markets fund, which I am still doing today. I believe the current financial crisis has probably accelerated the transfer of wealth from West to East and, although they can be volatile, these economies should continue to prosper over the next 20 years or more.
The most obvious way to access these opportunities is through a fund such as Lazard emerging markets. Fund manager James Donald, an American, remains bullish on the sector over the medium to long term. However, on a very short-term view, he is wary, considering that emerging markets have risen a lot recently and could be due for a brief pullback – this seems like a sensible view to me.
The Chinese market has made strong gains recently and the Russian market has been especially robust, roughly doubling in the last few months. This, of course, needs to be put in context – Russia had previously fallen by around 80 per cent from its peak last year so anyone unfortunate enough to invest at the top of the market still has sizeable losses.
This demonstrates the risk, volatility and potential reward of investing in this region. It takes a steady hand to invest successfully here.
The Lazard team approach emerging markets from a bottom-up view, seeking out attractively valued companies with good potential growth first and worrying about country allocation afterwards.
The recent rally in emerging markets has been linked to a rise in commodity prices and the two are closely correlated. If you already have some commodity funds in your portfolio, then you will effectively have some emerging market exposure by default.
The Lazard team have had a big overweight position in Russia, where they felt share valuations were low. Even after rising so strongly they still look good long-term value.
Interestingly, one area where the fund is underweight is China, with only one holding in the fund that represents 0.8 per cent of the portfolio. This reason for this is that Mr Donald cannot find compelling valuations at present and very few companies are sensitive to profitability, focusing instead on gaining market share. He believes most of the long-term potential in these stocks is already being reflected in the price so there is not as much profit to be had at present.
It is important that clients realise that emerging markets are higher risk and can be extremely volatile over the short term. However, those who can take a longer time horizons – particularly young people smart enough to be contributing to a personal pension – should be making contributions on a regular basis to this area.
Saving monthly can help smooth out the fluctuations in the market and you will not need to worry every time the markets take a brief lurch downwards. In fact, this will often work in your favour and allow you to buy more units cheaply. It is an obvious story, but at a seminar I spoke at this week I was reminded how few people understand even this basic fact, let alone realise their pension funds can in many cases be switched into these regions. Lazard has done a good job so far with its emerging markets fund and it is certainly one worth looking at.
Mark Dampier is head of research at Hargreaves Lansdown