Because of the significant growth seen in emerging global markets over the last 10 years and projections for continued growth in countries such as China, India, Brazil and Russia, some investors might want to explore purchasing assets in those markets.
The numbers spell out the obvious reason for continued investor interest.
“If you look at emerging markets 10 years ago, they were roughly five percent of the world’s stock market cap,” said Sandy Lincoln, chief investment strategist with M&I Wealth Management. “Today, they’re approaching 30 percent of the world market cap.”
In 2000, those markets accounted for 30 percent of the world’s economic output. In 2010, emerging markets accounted for 40 percent.
A mutual fund that deals with the BRIC countries (Brazil, Russia, India and China) is a great place for investors to start because of the difficulty in picking individual stocks in emerging markets, said Laura Thurow, co-director of private wealth management research at Robert W. Baird & Co.
“By accessing these markets through a vehicle where you can leverage a manager that is focused on the area, rather than trying to pick a stock in the Chinese or Russian market tied to a theme, you’re investing in a mutual manager with ties to those markets,” she said. “They’re thinking about bank policy, the geopolitical markets, they’ve got expertise and people on the ground in those markets. They will have history and will have seen things in these regions. They’ll know the short versus long-term themes.”
There are 21 countries listed in the MCSI Emerging Markets index, but six countries – China, Brazil, South Korea, Taiwan, India, South Africa and Russia – account for about 70 percent of the index, Lincoln said. Buying shares of such an index gives an investor a broad play in those emerging markets and allows them to take advantage of the fund’s shifts due to country, sector and individual company changes.
Investing in foreign equities also allows investors to hedge against risk in the domestic markets, Lincoln said.
“The materials sector in this country was 3.7 percent of the S&P at the end of 2010, and in emerging markets it was 15 percent,” he said. “The banking sector is 25 percent in emerging markets and in this country it’s 16 percent. Health care is 11 percent of the S&P, and in the emerging markets it’s less than one percent.”
Individual countries within the emerging markets have their own strengths that can allow an interested investor to take bigger stakes in certain sectors. For example, Brazil is strong in natural resources and energy.
“And Russia has tremendous oil reserves, but is the largest country in terms of natural gas reserves,” Lincoln said. “One way to fight commodity price (increases) is to buy emerging markets. There’s a big bang of materials there.”
Mutual funds, and particularly ETFs, can be made quite specific – down to country and even potentially an individual asset class to invest in. Both Lincoln and Thurow advise sticking to broader, multi-country assets.
“I would advocate something broader like a BRIC fund than an individual country,” Thurow said. “The BRIC fund, while it’s made up of four countries, doesn’t mean that you’re getting 25 percent of one country. They’ll flex in and flex out when they see an opportunity at the country and individual security level.”
Ken Evason, CEO and chief investment officer with Windermere Wealth Advisors LLC, takes a contrary view. He believes that investing in high-quality individual equities in emerging markets will yield the strongest results.
“Individual investments are how you build out to an aggregate portfolio,” Evason said. “We want to get away from the bias of not just looking at U.S. companies and look for the best companies (around the world). You have to be able to compare a Toyota to a Ford or GM. Only by doing that can (investors) build a portfolio of what they want to own. By using individual (company) names, you can build out your portfolio with less risk and in the best possible way.”
