The year began with hopes of a global economic recovery, but sluggish growth in some developed economies and crises over European government debts contributed to derail a consistent pattern of global economic recovery.
The US economy has struggled through 2009 with high unemployment rates and a troubled housing market causing political problems for President Obama.
In the UK the financial markets reaction to the government’s much covered austerity measures has been broadly positive with the FTSE 100 closing at 5412.88 on 31 December 2009 and coming through volatility to continue an upward trend closing at 5794.53 on 8 December 2010.
While there is positive sentiment about the UK economy going into 2011, uncertainties remain around the impact of substantial cuts in public spending that will begin to bite next year.
The latest economic growth predictions for the UK from the National Institute for Economic and Social Research put economic growth at 0.6 per cent in the three months ending in November. This is in line with expectations the NIESR said, but a slow down on the rate of growth seen earlier in the year,
If the recovery in many developed economies has been muted, there has been no shortage of commentary around the booming development in leading emerging market economies.
A strategy note published by Goldman Sachs analysts in May asked whether 2010 marked the beginning of the BRICs decade. BRICs was the term coined by Goldman Sachs’ Jim O’Neil for the leading emerging markets Brazil, Russia, India and China.
That note said a striking story over the next ten years was likely to be the growth of a global middle class, defined as people with annual incomes over $6,000 and less than $30,000. In terms of equity investments, as the ‘BRICs story’ has become better known, expectations of growth are higher and outperformance harder as share valuations go up.
Nick Scarrett, head of pensions and investment at Fair Investment Company sees the rise of the BRIC middle classes as a further investment opportunity. ‘Consumer trend and luxury goods funds can benefit from a rising middle class as they tend to flock to western brands. BMW’s sales in China doubled in 2010,’ he said.
The investment options when it comes to gaining exposure to emerging markets have increased in recent years.
Lower cost options for investment in an emerging market include passive funds which track a particular index or exchange traded funds (ETFs) which also track indices.
Amongst the actively managed investment funds launched in 2010 were the Allianz Global Investors Brazil fund and the Global Emerging Markets fund from Jupiter.
Allianz fund manager Michael Konstantinov said the fund had been launched because Brazil was in the ‘enviable position of having so many positive factors in place from both an economic and investment perspective.’
Speaking on the launch of the Jupiter Global Emerging Markets fund, manager Kathryn Langridge said the rise of emerging economies marked a ‘shift in the world’s economic axis’. “Given their growing significance, it is our view that emerging markets are underrepresented in many investment portfolios,” she said.
However, figures published by the Investment Management Association in December showed sales in emerging market funds hit their highest level in October.
The average rate of annual growth in these funds was 25.2 per cent. Over the last 12 months emerging market funds from some of the leading fund managers have returned from around 18 to over 30 per cent.
A passive fund that managed to track the MSCI Emerging Markets index in the 12 months to the end of October would have returned over 25 per cent growth.
Exchange traded funds (ETFs) can offer a wide range of options for emerging market exposure aiming to track more specific indices. For example, the range of ETFs under the DB-X brand from Deutsche Bank includes the MSCI EM EMEA Index fund which has holdings in European, African and Middle Eastern emerging markets. To the end of November the annual return on that ETF was over 10 per cent.
With all equity investment and ETF investments past performance cannot be seen as a guide to future performance.
China is the biggest economy of the BRICs, and several funds invest specifically in this economy. This year saw the launch of the China Special Situations Trust from Fidelity. As a closed-ended investment vehicle, the trust issues a limited number of shares which proved to be in high demand.
The Chinese economy is growing at a rapid rate, outpacing developed markets, with estimates putting annual gross domestic product growth at 9.9 per cent.
Looking beyond the BRICs, HSBC Global Asset Management said in November that Turkey was its preferred emerging market. HSBC estimate Turkey’s GDP growth will be 7.3 per cent in 2010, with a ‘solid’ banking sector, with industrial sectors favoured to exploit a manufacturing recovery.
The MSCI Emerging Markets Index of global stocks, often used as a benchmark for fund performance, contains companies from wide number of countries, including Poland, Hungary, Egypt, Chile and Malaysia.
Outlook for 2011
Several economic outlooks suggest emerging markets will continue positive growth into 2011, with a key term going into 2011 is likely to be ‘decoupling’ – when emerging markets become less dependent on their trading partners in developed economies.
In November, Invesco Perpetual Asian equity fund manager, Tim Dickson, said: “Trade between Asian nations is strong and builds on the region’s ability to eventually achieve an element of economic decoupling from the West. This much discussed phenomenon is also supported by increasing levels of domestic demand.”
However, there was some slowdown in growth in emerging markets in the second half of 2010 and concerns have been voiced that enthusiasm for investment in emerging markets is creating a bubble that cannot be justified by economic and business fundamentals.
There are greater perceived risks on investments in developing economies, such as political or corporate governance risks or the possibility of sudden regulatory change, as well as more volatile markets.
The investment funds referred to in this article should not be seen in any way as a personal recommendation. Past performance is not a guide to future performance. The value of investments and income from them can fall as well as rise and you may not get back the amount invested. Different types of investment carry different levels or risk and may not be suitable for all investors. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
© Fair Investment Company Ltd