By SIMON MOORE 01/07/2010
The focus on emerging markets has predominantly been around the four large countries that dominate the sector; Brazil, Russia, India and China. Each has different characteristics which demonstrate why it is important to make sure your exposure to emerging markets is well diversified.
Brazil
Strongly dependent on oil and commodities, Brazil will be exposed to greater falls should the global recovery falter, particularly if the China bubble bursts. The region is well positioned to benefit from an agricultural boom with over 1/5 of the world’s fresh water and a large fertile land mass. Brazil has recently undergone and committed to structural reform which will further improve the outlook for the country.
In addition to putting on a great show in this year’s World Cup so far, Brazil also plays host to the 2014 tournament and the Summer Olympics in 2016, which should give a boost to the local economy. The Brazilian stock market is dominated by two companies; Vale and Petrobras, so investors should look to diversify exposure to the region through global emerging markets funds.
Russia
The economy is linked to oil and consequently global economic growth. Although the oil demand in the west is being replaced by demand from China and Asia Pacific, the stock market is still sensitive to the price of oil. The other key issue that Russia faces is corruption, with many large companies falling foul of changing rules. Investors should be wary and whilst Russia cannot be ignored, it does remain a higher risk investment.
India
The country has a focus on pharmaceuticals and software making it different from the other BRIC economies. India has largely been ignored by investors because of China, but with growth expected to reach 8.1% by March 2011 and wages set to jump 10% in 2010 there is the story of an emerging powerful middle class in India, which will keep the country’s economy on an upswing. The risk is that inflation is not kept under control and a hard landing is the result. With exports comprising about 15% of GDP, the country is well insulated from global recession and another financial crisis, although its stock market is not.
China
China has been the big story of 2010 and has taken up more headlines than the other regions. With a focus on industrials and export, the Chinese economy is more dependent on exporting to the west than the other emerging markets. However, if demand slows, this will have impact on the other BRIC countries. The issues with China are the increasing concern over a property bubble developing and a lack of belief in the economic data produced by a centrally command driven economy; the jury is still out in the short term. Investors should be aware that a strong economy doesn’t necessarily lead to a strong performance in the stock market. Revaluation of the currency upwards will be good for UK investors and the long term (10 years). The growth story in China remains positive, but investors need to be prepared for a bumpy ride.
Our view
Investing in just four countries will reduce diversification and increase risk. These countries do not cover all sectors and are not guaranteed to provide the best stock market growth. The best performers are hard to find and will rarely merit the attention the big four get. Add to the mix political uncertainty, currency movements and it is anyone’s guess which country will rise to the top. Therefore, it is better for investors to get exposure through a global emerging markets fund.
Recommendations
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