Emerging markets still remain at the fringe of most investment portfolios, with Investment Management Association figures showing gross monthly sales hovering around 2 per cent, but their response to the credit crisis suggests that interest in the asset class coincides with a new confidence and independence there.
In the past, when developed markets wobbled, emerging markets fell over and took years to recover. This time it is different. Emerging markets have held up to the dramatic falls around the world. They too have fallen but on a par with and in some cases less than developed markets.
Look at the reasons for this and it is difficult not to feel that the long-term prospects for the asset class are stronger than ever, despite the difficulties elsewhere.
Follow the history of the current crisis back to its origin and it leads to the aggressive rate cuts made to support a US economy reeling from the bursting TMT bubble – the Greenspan Put. This led to excessive credit granting and to Americans borrowing too much to buy property. At the same time, it also led to the creation of very complex instruments with exposure to the risk of these borrowers defaulting.
The domino effect of these ordinary people failing to maintain their repayments and the unwinding of the complex investments related to them has led to where we are today. But this is a problem of developed markets and not emerging markets. People in emerging markets are not borrowing to the same extent as US consumers and homebuyers. They were not up to their necks in debt and the growth of emerging economies did not rely on them spending borrowed money.
The growth of emerging markets is being led by significant secular themes such as industrialisation, growing consumerism and the strength of global commodity prices. It seems impossible to avoid the headlines on commodity prices. Hard commodities such as gold, gold and oil have reached record highs this year. Soft commodities prices have pushed up the price of food. Some people are worried that the rise in commodity prices will end soon.
Yet there is evidence to suggest that we are at the early stages of a longer-term upward trend in commodity prices led by demand from the industrialising populations of India and China.
Most common commodities are exchange traded and can be subject to influence from speculative investors in the short term. This will lead to volatile commodity prices. However, even commodities that are priced by agreement between producer and manufacturer, such as iron ore, are seeing increases. In these cases, there is no speculative investment and it is demand and supply imbalance that pushes up prices.
To exploit this theme, investors can buy mining or oil stock directly or hold companies that benefit indirectly from the trend. An example can be seen in the agricultural sector where fertiliser stocks have performed well as farmers seek to increase yield under pressure from demand for their produce.
Another indicator is emerging market currency. Ties between emerging market currencies and the US dollar are coming under increasing pressure and it is likely that these will break, leaving emerging currency to float freely and in most cases appreciate in value. If China’s currency floated, the rise in value would increase its global buying power with inflationary impact.
Despite falls in emerging market investments since the credit troubles began and the prospect of a bumpy ride, the secular themes driving returns offer investors reasons to be optimistic.
Nick Price is portfolio manager of the emerging Europe, Middle East and Africa fund at Fidelity International