The turning point

This is the time of year when investors should be looking forward to the year rather than dwelling on last year’s trials and tribulations. The trouble is we tend to be conditioned by what has happened in the past and what is going on around us at the time. Achieving clarity of thought in such conditions is far from easy, which is why investors are too often on the back foot when it comes to identifying turning points.

All this was brought to mind as I was editing a newsletter, while preparing for a webcast and starting the planning process for a series of seminars to help prepare the adviser community for a world after the RDR. These three seemingly unconnected events harmonise in ways which made me think carefully about what the future may hold in store.

As an example, the investment managers contributing to the newsletter, which broadly gave a snapshot of the most recent experience of the funds they ran, all highlighted the growing economic power of what we still consider in many ways to be the third world. The participants in the webcast, which will look ahead at the prospects for the closed-end fund market for 2012, all remarked on the poor performance last year for China and the other emerging markets.

The contrast was interesting, to say the least. On the one hand, developing countries are the only ones to have achieved consistent economic growth during the post-banking crisis period. On the other, they had delivered the worst investment returns in what had been a pretty grim year for equity investors.

It struck me either the market knew something that was not visible to me or investors in general were getting it wrong.

The three fund managers whose comments I was editing all had very different mandates – UK smaller companies, UK income and global growth – and had remarked independently on the growing trade between the less indebted nations of the developing world. This, and the rise of a whole new middle class – one which will swiftly outnumber that of the developed West – suggested that the emerging markets’ argument was far from over.

The fear recently had been that these countries might have their growth tempered as demand from the countries of Europe and North America, not to mention Japan, suffered under the weight of austerity measures.

Yet it appears growth is on track to be maintained in Asia, Africa and South America, creating the conditions for a massive overturn of economic rankings. Already, we have been pushed back into sixth place. It may be that we will not even be in the top 10 by the middle of this decade.

Economic growth in these regions does not automatically convey prosperity to the businesses operating in the countries concerned – and many of these may be foreign anyway. But it did strike me that the poor performance of China and the other emerging markets last year owed more to the risk-off approach being adopted by investors than to any fundamental issues. It also made me wonder about the prospects for inflation again.

Continued demand from a rapidly expanding new consumer society must put upward pressure on resource prices and return pricing power to companies.

If evidence builds that economic growth is being maintained, despite the pressures on Europe and other developed countries, then we might just see a return to a more confident mood among the wider investing public. Inflation would have the effect of enhancing the value of financial assets and devaluing debt. It could be a good year after all.

Brian Tora is an associate with investment managers JM Finn & Co