Despite increasing business confidence and strong growth forecasts for Germany in August, economic data for Europe has been inconsistent, relying on Germany and France for good news.
Growth in most other countries in the euro area has slowed. This mixed picture in Europe, together with falling house sales and uncertainty over unemployment in the US could see investors seeking returns from the emerging market economies, which continue to grow.
The BRICs – Brazil, Russia, India and China – lead the charge of developing nations seeing rapidly developing industries, promising predictions from economists and increasing global influence.
A report from Morgan Stanley earlier this month pitted China against India, with India coming out on top in its predictions for which country would be enjoying stronger growth come 2015.
Indian investment in its infrastructure and the increasing numbers joining the workforce, with rising wages, are seen as key drivers to secure the longer term future for economic development in the country.
Author of the report Chetan Ahya said: “We believe that, over the next two years, India should start matching China's GDP growth of around 8.5-9.5%, barring another global financial crisis. More importantly, we think that, by 2013-15, India will start outpacing China's GDP growth notably.”
Although China has a good reputation for infrastructure investment, showcased by the Beijing Olympics, the low level of domestic consumption and limited buying power for the majority of the population in China is seen as a potential problem.
Should stalled economic growth in Japan, Europe and the USA lead to shrinking demand for exports there could be a knock-on effect for China.
A signal of investor confidence in the emerging markets, the MSCI Emerging Markets Index, has crept upwards following the slump in stock market levels seen in late 2008 and 2009.
Despite similar volatility to that experienced on the FTSE 100, the MSCI has seen upwards growth in recent weeks. A five day lull ended on 26 August with a 0.3 per cent gain, as exchanges in the Philippines, Russia and India posted increases.
Emerging-market strategist at Morgan Stanley Jonathan Garner recently wrote that emerging markets had a ‘superior economic and earnings outlook’ compared to developed economies, adding that equities (company stock) in these markets had ‘recently begun to outperform significantly’.
Looking at the MSCI index before the rally on 26 August, Garner’s research showed that 11 countries outperformed the index which was down -2.0 per cent ahead of 26 August, citing Thailand, Colombia and Malaysia as top performers.
A number of investment management firms offer funds that invest in developing economies.
Recent research by Barings showed an increasing number of UK investors were looking at investment opportunities in developing economies, with chief investment officer Marino Valensise saying that it was an ‘optimum point in the global economic cycle’ for investing in emerging markets.
“The fact that an increasing number of people are considering emerging market funds for investment is really encouraging,” he added.
Although there are prospects for growth, investing in developing economies does carry significant risks.
In July, the Schroders market report said "market conditions remained volatile" on the MSCI Emerging Markets index and the positive returns that were seen lagged behind developed markets.
© Fair Investment Company Ltd