In recent years, emerging markets have experienced a big growth , which contrasts with the progressive decline of Western countries. The strong fundamentals, with sustained growth, sound public finances, strong growth trend in corporate earnings, have been the key to success in recent years. It’s not only BRIC (Brazil, Russia, India and China) that we are considering: there are a lot of other markets with an even stronger potential to grow.
Emerging Countries now contribute to 50% of the global GDP, with an ever-growing trend so that in the coming years important trends will be destined to change. Indeed, Western countries are also looking with great interest to these areas so that larger companies are now established in these contexts, now considered as one of their primary markets. An increasing amount of resources is diverted onto these areas. Among the largest enterprises (DJ Stoxx 600), from '90 to now, the share turnover in emerging markets has risen from 9% to 20%, with peaks of 50%.
How to invest in emerging markets? The vast majority of retail investors cannot select individual stocks in these countries and perform transactions. Indeed, even if it were possible, it wouldn’t be easy to obtain the right information to enable a pertinent analysis. It would be ideal to invest in assets with an higher differentiation having a large amount of securities. The most effective tools are the Funds and the ETFs.
The first ones showed a greater efficiency in performance, but the investor that operates autonomously, ie without a consultant help, prefers ETFs that replicate passively the underlying without making active management with stock picking. According to a recent analysis made by Morningstar, ETFs have outperformed the market only 4 years in 10, while funds 8 years in 10. The yield differential is substantial.
In recent years many analysts have wondered if it’s better to invest in emerging markets or is it preferable to do so in the Western companies that generate a significant portion of its sales in those areas?
In order to study the trends of the latter, Goldman Sachs has created a directory called BRIC Nifty 50 Developed Markets, where the average revenue produced in emerging areas is equal to 29%.
The result obtained from the index in the past 5 years was equal to 6% versus -5% for the S & P 500, but well below the +45% achieved by the MSCI Emerging Markets.
Is it better to invest individually in the emerging countries or globally over the whole area?
Obviously it’s not an easy to answer. Of course, investments in a single area bring bigger risks if compared to a global approach.
Finally, there is another dilemma when we consider emerging Countries: is it better to invest in their bonds or in their stocks? Lately, both have given investors a great satisfaction albeit with different levels of risk/return. We must consider that emerging countries’ spread is lower than western Countries’ and the tendency is about to decline further.
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