Revisiting The Emerging Market Investment Story

Emerging markets have been out of fashion of late, driven largely by current account deficits, capital outflows and a credit squeeze in China.emerging-markets-BRIC-MINT

This brief post will highlight and reinforce the fundamentals which make the emerging markets a compelling long-term investment.

1. They are home to 85% of world’s population
2. They constitute 50% of world GDP and contribute to 75% of worlds GDP growth.
3. Comprise of mainly a young and dynamic population – between 29 and 59.
4. Has a natural resource advantage, for example its home to 90% of the world’s proven oil reserves.
5. Rise of a consumer society, fueled by the expanding middle class and higher incomes.

However, these countries only account for 15% of the world’s stock market. Roger Bootle, economist and author believes that sophisticated investors will gain exposure to the emerging markets through good-quality western companies with large operations in the developing economies.

This strategy allows you to take advantage of western standards of corporate governance, attitudes to dividends and political stability – combined with a share of the emerging market growth story.

Source: Fidelity Worldwide Investment

Valuation: Based on forward times earnings they currently trade at a weighty 30% discount relative to developed markets. Every veteran will be aware of the fact that the lower the initial valuation, the greater the long-run returns – this is called the value effect. And, its worth remembering that Emerging economies grow at twice the rate of developed countries, which should translate into better investor returns.

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