Emerging Market Investing:
I’ve been threatening to say something about this topic for several weeks.
Just a few brief points:
- The case for emerging markets is very strong and very valid but it is a long term proposition
- Any survey of emerging market indices over the last decade demonstrates the considerable volatility of this investment theme
- A particular danger for retail investors is the classic value trap; an EM index rises 50%, 70% in a year and retail investors pile in. The next year the index falls 50%, 70% and retail investors pile out chalking up the big losses and disappointments that always come from buying high and selling low
- The experience of foreign portfolio investors in China over the last 5 years has been very disappointing despite Chinese GDP growth of 8% plus
What is to be done?
- Take a long term view, be patient. In great part Emerging Market investing is about demographics and the creation of a middle class in places like China, India and Latin America
- A constructive investment theme may be to focus on the consumer economy of emerging markets which in part can be accessed through local consumer facing companies and in part through investments in western companies selling into EM consumer markets
- Some examples: Yum Brands (fast food), various “Luxury goods” companies (not a sector I personally like). Many luxury goods companies, large (LVMH) and small are finding increasingly that EM consumers are becoming their single biggest demographic. Additionally, we have a whole range of industrial materials, metals and mining companies that don’t deal with consumers directly but supply the material for the infrastructural development demanded by a rising middle class
- Also worth looking at are soft commodities, foods such as vegetable oils and grains and fertilizers (e.g. New Britain Palm Oil, MP Evans, Potash, Sirius Minerals)
Walter is the author of the forthcoming Thematic Investing (to be published by Searching Finance 2012)
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