Emerging Markets for Your Investment Portfolio - dummies

By David Stevenson

The remorseless rise of hedge funds has occurred in an era of unprecedented globalisation, but this is no coincidence. Over the last 40 years UK investors have seen the financial system spread its tentacles all over the planet, and trading for many sectors, such as bonds, is now truly international. Many institutional investors don’t think twice about buying US shares one day and selling Chinese renminbi or Australian shares the next.

This globalisation favours the hedge-fund community, and many leading practitioners come from developing-world countries such as India and China. The international bias is reinforced by the huge choice available at the global-market levels, allowing an innovative manager the opportunity of worldwide reach at the touch of a button.

The growing enthusiasm for developing-country markets is also driven by the simple fact that emerging markets, such as China, Brazil and India, are growing much faster than their developed-world counterparts.

This powerful economic progress has produced more than two decades of astonishing returns in the stock and bond markets. The rush into these emerging markets is great news for you, as an advanced private investor, especially if you’re willing to put in the research to find the best opportunities.

You can copy much of what the emerging market hedge-fund community is doing, which is why you should examine its core strategies to see what works.

Emerging markets (EMs) are countries that are in the process of developing economically. They typically have per-capita incomes at the lower to middle end of the world range, and are in the process of moving from a closed market economy (one that is not open to business from other countries) to an open market economy.

But a wide variety of different countries and opportunities lie behind this rather bland definition. A broad classification of EMs includes China and Russia, two of the world’s economic powerhouses, as well as highly developed South Korea and fast-growing but still relatively poor Colombia.

The link between all EMs, however, is that they have in the last few decades embarked on rapid economic development and reform programmes and thus emerged onto the global financial scene.

Although only around 20 per cent of the world’s nations are considered EMs, these countries constitute approximately 80 per cent of the global population. In fact, according to hardcore enthusiasts, EM states may well account for an astonishing 50 per cent of world gross domestic product (GDP) in the next ten years.

If that happens, investors in developed countries have a great deal of catching up to do, because most private and institutional investors in the UK and US have a little under 10 per cent of their assets in EMs of one shape or another.

EMs have replaced developed-world small caps and technology stocks as the planet’s favourite growth assets.

But something else is also afoot that’s absolutely fascinating. These fast-growing, developing countries are becoming increasingly popular with investors worried about the financial imbalances in the West. Countries such as Russia and China appear to have better balance sheets and stronger, more robust economies than many once-successful developed-world economies such as Spain or France.

EM shares and bonds are certainly still viewed as volatile, but their perceived riskiness has declined in recent years. The situation sparked a massive surge of interest in EM currencies and bonds, which helps the hedge-fund community with its openness to investing in different asset classes.